Is it better to transfer your old 401(k) to your new 401(k) plan when changing corporate jobs?

Chris Reddick |

Employees in corporate professional careers often switch jobs during their careers. But what should you do with the old 401(k) or 403(b) retirement plan?

Depending upon the 401(k) plan that your current employer offers, this can typically be the best choice. Larger employers are especially obligated under the Employee Retirement Income Security Act (ERISA) of 1974 to provide plans in the employee's best interest. ERISA protects millions of Americans' assets so that funds placed in retirement plans during their working lives will be there when they retire. Most importantly, it specifies that plans must work as fiduciaries, meaning they have to work with employees' best interests. In fact, employees have the right to sue for benefits and breaches of the fiduciary duty.

Benefits of a Transfer to the new 401(k) plan

Another option is to roll over your old 401(k) plan into an Individual Retirement Account (IRA). I don’t usually suggest this as a good option for most corporate employees for the following reasons.

1. Typically, lower management fees for corporate 401(k) plans. Since larger corporate employers need to attract and retain employees, they typically offer plans that have lower fees and good investment choices. They also have plans that are generally in the best interest of employees, given ERISA. You could potentially pick different providers in these 401(k) plans. Talk to a financial planner to determine what provider offers the best investment options.

2. You don’t have to take required minimum distributions (RMD) at age 72. With a qualified plan such as a 401(k) or 403(b), you are not required to take distributions until you retire from the position. So you could potentially work in your corporate career past age 72 and not take RMD until you retire from the position. With an IRA, you are required to start RMD at age 72.

3. Retirement accounts that qualify under the ERISA are generally protected from creditors, bankruptcy proceedings, and civil lawsuits. IRAs do not have this important protection. This is a major difference from IRAs, which don’t have this protection and should be carefully considered.

4. A selection of target-date funds. Typically corporate 401(k) plans offer target-date funds from Fidelity and Vanguard, being common choices. There are often too many dizzying choices with IRAs, which can be more expensive since employer-sponsored 401(k) plans work out deals with Fidelity and other providers for lower costs. But be aware that not all employer-sponsored plans will have low fees. It is best to check with a financial planner to evaluate the plan and its investment options.

Important Tax Rules for Transfers and Rollovers

There are important differences between a rollover and transfer that you should be aware of. A trustee to trustee transfer is when you have the old 401(k) custodian send the money directly to your new 401(k) plan provider. The money is essentially transferred directly, and you do not see the check. This is by far the best option!

A rollover is different in that the money is cashed out with a check from the old 401(k) plan, less 20% withholding, in your name. If you don’t put the money back into the 401(k) plan, including the withholding, in 60 days, it will have an additional 10% penalty assessed as well. An indirect rollover is when the check has the new custodian's name on it, with no withholding, so you need to get it into the new account in 60 days.

For most corporate plans, they are used to the trustee to trustee transfer, and this is the best approach. The second-best approach is indirect rollover. With the transfer, the money does not get in your hands, and there are tax consequences if deposited correctly. You are also allowed to do as many transfers as you want and are not limited to one per year with an IRA rollover. In summary, unlike a rollover in which individuals personally receive a distribution from their IRA, direct (trustee-to-trustee) transfers between IRAs are not considered distributions and are NOT subject to the once-per-year limit.

In Summary

Be sure to check with your tax professional before making transfers or rollovers from your old 401(k) to the new 401(k) plan. Also, talk to a financial planner to maximize your investment options and make sure you are on target for retirement.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.



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