Rolling an old 401(k) into a new employer's plan

After a job change, one of the choices for an old 401(k) is to move it into the new employer's plan. The appeal is simplicity: one account, one statement, one set of investments to watch. Whether it is a good fit depends on the new plan itself, and on a few rules that apply to employer plans but not to IRAs. This post looks at that one option in detail. The guide to old 401(k) options compares all four.

First question: does the new plan accept rollovers?

Not every plan does. The IRS states that a retirement plan is not required to accept rollover contributions, and suggests checking with the new plan administrator to find out whether they are allowed and what types of contributions are accepted.

Things to ask the new plan:

• Does it accept rollovers from a former employer's 401(k)?
• Does it accept Roth 401(k) money and, if applicable, after-tax contributions?
• Can a rollover be made right away, or only after becoming eligible to participate?
• What paperwork does it require from the old plan?

How the new plan compares with the old one

The IRS page on leaving a job frames the decision around three questions: whether the new plan has better investment options, how its fees compare with the old plan's, and whether consolidating into one plan makes savings easier to track.

Fees and investment menus vary a great deal from employer to employer. A large employer's plan may have access to lower-cost versions of funds than a small employer's plan, or the reverse may be true in a given case. Plans provide participants with fee information, and the guide on what 401(k) fees cost explains how to read one.

It is also worth knowing that leaving the money in the old plan is often possible, and that a rollover to the new plan can generally be done later. The IRS notes that some people keep a balance in an old plan specifically because they want to move it to a new employer's plan later.

How a plan differs from an IRA as a destination

The other common destination for an old 401(k) is an IRA. A few rules differ between the two, and they matter more for some people than others.

Loans. The IRS states that IRAs cannot offer loans, while employer plans may. In a plan that allows borrowing against rolled-in money, a larger balance can mean a larger amount available to borrow. Whether borrowing is wise is a separate matter covered in 401(k) loans.

The age-55 exception. Distributions before age 59½ are generally subject to a 10% additional tax. IRS Topic no. 558 lists exceptions for employer plans, including distributions made after separating from service with the employer after reaching age 55. That exception applies to qualified plans and not to IRAs. For someone who might leave the new employer between 55 and 59½, money held in that employer's plan may be reachable without the additional tax, while the same money in an IRA generally would not be. See early withdrawals and the rule of 55.

Required distributions. The IRS explains that required minimum distributions from a 401(k) generally must begin by April 1 following the later of the year a person reaches age 73 or the year they retire, if the plan allows the delay. For IRAs there is no such delay for people still working. The delay generally does not apply to someone who owns more than 5% of the business, a rule described in IRS Publication 575.

Roth, after-tax and company stock

Certain kinds of money need extra care.

Roth 401(k) money can be moved to a Roth account in the new plan only if that plan has one and accepts such rollovers. The IRS designated Roth FAQs state that a rollover into another plan's designated Roth account must be made through a direct rollover. The post on Roth 401(k) rollovers covers how the five-year clock carries over.

If the old account holds shares of the former employer's stock, rolling them into another plan or an IRA gives up a special tax treatment that may otherwise be available. See company stock and net unrealized appreciation before moving that kind of holding.

An outstanding loan in the old plan usually cannot simply be carried over. What happens to it at separation is covered in the loans post linked above.

How the transfer is done

The mechanics are the same as for any rollover and are explained in how a 401(k) rollover works. In outline:

1. Confirm with the new plan that it accepts the rollover and get its instructions, including how a check should be made payable.
2. Ask the old plan for a direct rollover to the new plan.
3. The old plan sends the money to the new plan, or issues a check payable to the new plan for the participant to forward.
4. Confirm the deposit and check how the money was invested. Rollover money usually follows the participant's current investment election in the new plan.

The IRS notes that with a direct rollover no taxes are withheld, and that a check made payable to the receiving plan is not subject to withholding. A distribution paid to the participant personally is subject to mandatory 20% withholding, which is one of several pitfalls described in common rollover mistakes.

Only the vested balance moves. Any unvested employer contributions were forfeited under the old plan's vesting schedule and are not part of the rollover.