Changing Jobs: Should You Roll Over Your 401(k)?

Changing jobs? Here are five ways to handle the money in your employer-sponsored 401(k) plan, including some pros and cons of each. 

The pros: If your former employer allows it, you can leave your money where it is. Your savings have the potential for growth that is tax-deferred, you'll pay no taxes until you start making withdrawals, and you'll retain the right to roll over or withdraw the funds at any point in the future.

The cons: You'll no longer be able to contribute to the plan, and the plan provider may charge additional fees because you're no longer an employee. Managing multiple tax-deferred accounts can also prove complicated. The IRS mandates required minimum distributions (RMDs) annually from all such accounts beginning at age 73 (assuming you're no longer working for the employer sponsoring the account).¹ RMDs are calculated based on all of your tax-deferred retirement accounts. If you fail to correctly calculate your RMD or don't take it on time, you may owe a 25% penalty on the shortfall.²

The pros: Assuming you like your new plan's costs, features, and investment choices, this can be a good option. Your savings have the potential for growth that is tax-deferred, and RMDs may be delayed beyond age 73 if you continue to work at the company sponsoring the plan.

The cons: You'll need to liquidate your current 401(k) investments and reinvest them in your new 401(k) plan's investment offerings, which will take time and some research. The money will be subject to your new plan's withdrawal rules, so you may not be able to withdraw it until you leave your new employer.

The pros: Because IRAs aren't sponsored by employers—you own them directly—you won't have to worry about making changes to your account should you change jobs again in the future. IRA providers may also offer a wider array of investment options and services than either your old or new employer-sponsored plan. 

The cons: Once you roll your funds into an IRA, they may no longer be eligible for a future rollover into a 401(k) plan, and RMDs apply at age 73, regardless of whether you're employed. Also, you'll need to specify how the funds in your traditional IRA are to be invested. Until you do so, the money will remain in cash or a cash equivalent, such as a money market account, rather than invested. 

The pros: Withdrawals are entirely tax-free in retirement, provided you're over age 59½ and have held the account for five years or more. Roth IRAs are also exempt from RMDs.

The cons: Because Roth IRAs are funded with after-tax dollars, you'll have to pay taxes on your existing 401(k) funds at the time of the conversion. If you make a withdrawal before you're 59½, you may be subject to income tax on the earnings and a potential 10% early withdrawal penalty on the withdrawal amount, if you do not qualify for an exception.³

The pros: In a word: liquidity. If you leave your job during or after the year you turn 55, you can withdraw money directly from your 401(k) without early withdrawal penalties.

The cons: Withdrawals are subject to mandatory 20% federal withholding and, in some cases, mandatory state withholding. However, if you fail to move the money into a qualified retirement plan within 60 days, it is taxed as ordinary income, plus a 10% penalty if you're under age 59½, which means you could end up paying significantly more than 20%, depending on your federal and state income tax rates. You may also negatively impact your retirement goals.