Should I Roll Over My 401k?

A 401k rollover can help protect your tax benefits.

A 401k plan is an employer-sponsored retirement plan that gives you numerous perks — like tax deferral and employer matches of contributions — while you’re saving for retirement. You’ll generally keep your 401k plan until you leave your job, whether through new employment or retirement.

But there are some reasons why you would not necessarily want to roll over your 401k account. Here’s a look at 401k eligibility rules, benefits and scenarios that might make you think twice about rolling over your plan.

Eligibility for 401k Rollover

Typically, you can roll over a 401k plan when you change jobs or when you retire. Some plans also allow you to roll over your 401k plan while you are still working. A rollover is different than a withdrawal, which results in the taxation of your funds plus a 10 percent penalty if you take money out of your 401k before you reach age 59 1/2 — or 55 if you’ve left your job.

Benefits of Rolling Over Your 401k

The main benefit of a 401k rollover is that you get to retain your tax benefits. Rolling your money over to another 401k — or an individual retirement account — allows your money to continue growing tax-deferred until you withdraw it from the account. But your 401k contributions are typically pre-tax if you’re still making contributions, whereas your after-tax IRA contributions might provide you with a tax deduction. 

Another potential plus is that you’ll get access to a new range of investment options for your retirement fund. In the event you change employers, there might be a waiting period before you’re allowed to roll over your account. But your new 401k plan will most likely have different funds for you to choose from.  Rolling over your 401k to an IRA will present you with even more options because IRAs are self-directed accounts. Rather than having to choose from the investments your employer’s plan offers, you can typically buy nearly any type of investment, from stocks and bonds to certificates of deposit and exchange-traded funds.

Keep Reading: Benefits of a 401k Rollover

Changing Jobs vs. Retirement

When you change jobs, you typically have four options for what to do with your 401k:

  • Leave your money with your former employer.
  • Roll the assets into the new 401k.
  • Roll the assets into an IRA.
  • Take a withdrawal.

You’ll likely have the same options when you retire, except you won’t be allowed to roll over your money into a new 401k.

It generally makes sense to roll the money into your new 401k plan after you start a new job, particularly if your employer matches contributions. Employer matches are the closest thing in the investment world to free money. Moving your money to an IRA, on the other hand, means you are the only one who will be making contributions.

Retirees are often past the contribution phase of their investing lives, but it’s a smart retirement-planning move to keep your money in a tax-deferred account for as long as possible, particularly if you are generating a large amount of income or capital gains. Rolling into an IRA is your only option for keeping your retirement savings in a tax-deferred account if you can’t keep your money in your former employer’s 401k plan.

When Rolling Over Might Not Be the Best Option

It might be best to leave your money in your former employer’s 401k plan if it’s an outstanding plan with excellent investment options and low costs, even if you retire or take a new job. But bear in mind that an ex-employer might not allow you to keep money in the plan, particularly if your balance is below $5,000.

Related: How to Roll Over Your 401k