Should You Roll Over an Old 401(k) to a New 401(k)? (2024)

If you have $1,000 to $5,000, your former employer can move funds from your 401(k) to an individual retirement account (IRA) of its choice. If you have less than $1,000, it can simply cut you a check. If you receive a check, you’ll need to put it into a tax-advantaged retirement account within 60 days to avoid penalties.

Indirect Rollover vs. Direct Rollover

There are two methods you can use to roll over an old 401(k) into a new one: an indirect rollover or a direct rollover.

A direct rollover is when the money in your old account is directly transmitted to your new account without you ever touching the funds. To do this, you can reach out to the plan administrator and ask them to transfer the funds to another retirement plan without any taxes being withheld.

An indirect rollover occurs when you receive a check in your name covering the full amount of your previous 401(k). When you receive that check, you have 60 days to deposit the funds into a new retirement plan, whether that’s a new 401(k) or a different retirement plan altogether. Financial institutions typically withhold around 20% in taxes. When you make your deposit, you must make sure to include that 20%; otherwise, it could be considered an early distribution and you could face penalties.

Benefits to Rolling Over to a New 401(k)

Rolling over an old 401(k) to a new one has several advantages:

• Potentially more cost effective: Each 401(k) is different. Compare costs between your old plan and the new one. In many cases, your new plan may be more cost effective.
• Easier management: It’s generally easier to manage one account vs. multiple accounts. By rolling over your old retirement plan into your new employer’s 401(k) plan, you can keep all of the information in one place. A recent study by Capitalize estimated that there were 24.3 million forgotten 401(k) accounts holding $1.35 trillion in assets as of May 2021.
• Advantages of the “rule of 55”: If you retire or lose your job when you’re 55 years old, you can take funds out of your retirement fund without suffering any penalties. This is called the “rule of 55,” and it only applies to your latest employer. Funds from an earlier employer’s plan are not eligible.
• Continued growth can compound: By rolling over your old 401(k) into a new one, you can ensure that you’ll continue earning interest on those funds. Over time, compounding interest will help your retirement account grow.
  

Downsides to Rolling Over to a New 401(k)

• Potentially different rules: Your new employer will have control over the new plan and can change aspects of it, such as fees and the plan administrator.
• Possibility of higher fees: Higher fees can cut into your earnings. Be sure to check out the fee structure before opting to roll over into the new plan.
  
• Loss of investment options: The number of investment options in 401(k) plans have declined in recent years. This means that other retirement plans like IRAs could offer a wider range of investments that you can use to diversify. A new 401(k) plan may not offer the same investment choices as your original plan.
  

The Bottom Line

A 401(k) provides a valuable savings tool to help you reach your retirement goals. You can roll over a 401(k) to a new 401(k), but before you do, consider all your options. You can also cash it out, roll it over to an IRA held by yourself, or leave it with your original employer. Each of these options has pros and cons to consider.