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Where to Transfer Your 401(k)

By Justin Pritchard, CFP®

When you leave a job, you typically get to choose what happens with your retirement savings. That’s the case with most 401(k), 403(b), and other retirement plans. You often have the opportunity to take control of your savings, but you might also have the option to leave assets with your former employer.

If you decide to move the money, where should you transfer your 401(k) savings? On this page, we’ll cover the most common options available when you retire or change jobs:

  • Transfer to an IRA that you control
  • Move to your new job’s retirement plan
  • Transfer to a bank account
  • Buy an annuity if you want income guarantees
  • Leave the money where it is (don’t transfer it)

Transfer to an IRA

One of the most popular options is to move funds into an IRA that you have control over.

With that approach, you choose the investment provider, specific investments, and other account features based on your needs. You may be able to find a solution with lower fees and quick transfers, or you might go this route to work with a financial advisor who is helping you manage your retirement income.

The decision to switch to an IRA is a big one. Before you make the move, evaluate the pros and cons carefully. There may be benefits to staying in your workplace plan (such as when you retire after age 55 but before 59.5), and your job’s plan might be just fine for your needs. Research the pros and cons of transferring your 401(k) to an IRA—as well as the steps you take when doing so.

Advantages:

  • Control over investments
  • Quick and easy withdrawals
  • No affiliation with a former employer
  • More distribution and beneficiary options?

Potential pitfalls:

  • Fees might be higher or lower, depending on your circumstances
  • Potential withdrawal penalty for separation of service after age 55
  • Some institutional options might not be available in retail accounts

Continue reading below, or watch a video that covers this information:

Where to Open an IRA

So, where exactly should you transfer the funds from your 401(k)? Find a provider that offers the products and services you like. Large, reputable brokerage firms and mutual fund companies often offer IRAs that allow you to invest in various vehicles (not just their own funds) and link your bank account to the IRA.

For several reasons, I hesitate to name names, but this is something I help DIY clients with (choosing an IRA provider and getting the money invested). The popular low-cost brokerage houses with index funds are often an excellent choice, and robo-advisors are also options. Finally, if you prefer to get individualized help, a fee-only financial planner can guide you through the process and even manage investments for you.

Direct vs. Indirect 401(k) Rollovers

If you decide to transfer funds to an IRA, consider doing so with a direct rollover, also known as a trustee-to-trustee transfer. With that option, the 401(k) plan writes a check to the new IRA provider instead of making the payment to you (yes, they still use checks). The alternative is for you to receive the funds and then forward the money to an IRA using a 60-day rollover.

60-day rollovers can work, but they can also be problematic. Your former employer typically withholds 20% of your balance for federal income tax. As a result, you’ll need to replace those funds somehow and get 100% of your distribution back into an IRA within 60 days. If you don’t have cash on hand, the IRS could treat the missing 20% as a “distribution” that causes income taxes and early withdrawal penalties.

Move to Your Next Job’s Plan

If you left your job for a different job, you might be able to transfer your 401(k) assets into the new job’s 401(k), 403(b), TSP, or another retirement plan. 

This strategy allows you to keep your retirement savings in one place and simplifies life. Before deciding on this, compare fees and expenses on both plans, and ask your new employer if you’re allowed to roll money into the plan. Then, find out if you can withdraw that money if you ever need it.

Advantages:

  • Simplify and minimize the number of accounts
  • Avoid leaving a trail of old accounts with former employers
  • Potential for larger 401(k) loans

Potential pitfalls:

  • New plan might have higher costs or be more restrictive
  • Might not be able to access the money while employed

Transfer to a Bank Account

If you plan to spend all of your money immediately, it may make sense to cash out. 

To do so, you would request that the funds be paid to you directly—not to another retirement account. But if you have pre-tax money in the plan (and other money types), you might owe taxes when you withdraw the money. The tax bill could be significant, and it may be necessary to pay estimated taxes, so discuss this with a CPA or financial planner before you take action.

All that said, you saved this money for a reason, and now might be the time to withdraw the funds and pay the taxes. It’s never fun to pay taxes, but if you need the money you need the money. Still, consider drawing out the funds over several tax years if that would benefit you financially.

Advantages:

  • Spend the money—that’s what it’s for (eventually)
  • No need to open new accounts

Potential Pitfalls:

  • Significant tax consequences could follow
  • Retirement savings are depleted and no longer in tax-favored accounts
  • Potential tax penalties, depending on the situation

Buy an Annuity

Annuities provide unique guarantees. The ability to get an income stream that lasts for your life might be one of the most attractive features for retirees. 

If you want to convert your retirement assets to an income stream, an income annuity may be a solution. However, putting all of your money into an annuity can be problematic. You might not be able to get your money back if you opt for the highest payments, and annuities can have high costs and restrictions. Be wary of putting all of your money into annuities. If you want to transfer a portion of your retirement savings into one of these products, it may make sense, but be sure to explore the pros and cons before doing so.

Advantages:

  • Potential for lifetime income guarantees
  • Financial market movements (crashes) might not matter with money in an annuity

Potential Pitfalls:

  • Irrevocable decision if you annuitize
  • Surrender charges and rigid rules with some products
  • High costs on some products

Leave the Money Where it Is

You don’t necessarily need to move funds out of your job’s retirement plan after you stop working. If you have an excellent, low-cost 401(k), there’s nothing wrong with continuing to invest in that account. However, it’s wise to verify how things work when you want to take money out, and it’s crucial to make sure your beneficiaries work the way you want.

Keeping the funds in your workplace plan can be a temporary or permanent solution. For example, if you’re in between jobs, or if you’re not confident that you’ll stay in your new job for a long time, you can simply delay. But in some cases, as with the government TSP, people might choose to keep funds in the plan for the rest of their lives.

If you have less than $5,000 or so in your plan, you might not be allowed to leave funds in the plan indefinitely (the plan might force you to roll over or cash out).

Advantages:

  • No need to make decisions or fill out transfer requests
  • Keep access to an excellent plan (assuming you have a good plan)

Potential Pitfalls:

  • Distributions might take longer, and the former employer might need to approve distributions
  • Cumbersome steps to get money, in some cases (making a phone call or filling out a form)
  • Limited control over investment options
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