Back

Changing jobs and rollovers

Lesson in Course: Finance at work (beginner, 10min)

We're planning to take another job. What do we do with our retirement accounts?

Eureka!

What it's about: Switching jobs is an opportunity to move our retirement account with our previous employer.

Why it's important: Consolidating our accounts makes it easier to manage our investments.

Key takeaway: Choosing to rollover our account into a 401(k), IRA, or Roth IRA depends on our needs and how we want our investments managed.

Leaving a job or starting a new one can be an excellent opportunity to clean up our finances. Here are a few things we can do with our retirement accounts when our last day is approaching.

Consolidating our 401(k)s

We can combine all of our retirement accounts from previous employers into a single account by initiating a rollover.

What is Rollover?

Transferring all cash and investments from one or multiple accounts into another account.

It's easier to manage our retirement investments when they are in one place while still keeping the tax benefits. Depending on how we consolidate our accounts, we could have more flexible investment options. Here are three ways to consolidate:

401(k) to IRA rollover

A 401(k) to IRA rollover offers us substantially more investment choices in our retirement account. 

An IRA gives us a lot more choices

401(k) accounts typically don't allow purchases of individual stocks or options, while IRAs have no limits in what we can invest in — some folks even buy crypto or end up angel investing in startups out of their IRA. If we want more control over our investments, we can open an IRA with an established brokerage.

Rollover IRAs
https://www.youtube.com/watch?v=7ediw8AEuIA&ab_channel=TDAmeritrade
 

401(k) to 401(k) rollover

A 401(k) to 401(k) rollover is excellent if we prefer simple investments. 

401(k) to 401(k) keeps things the same

When we combine previous 401(k)s into the 401(k) account offered by our new employer, the company pays for access to target-date funds and financial experts to help manage our accounts. However, if we do a 401(k) to 401(k) rollover, we cannot convert the account into an IRA until we change jobs again.

401(k) to Roth IRA rollover

A 401(k) to Roth IRA rollover cause a taxable event since 401(k) funds are pre-tax and Roth IRA contributions are after-tax. The rollover is beneficial in certain situations because we'll owe income taxes for the total amount of funds converted. If income is above certain limits, we start losing our ability to contribute to a Roth IRA. Yet, a 401(k) to Roth IRA rollover could allow us to get around these limitations and fund our Roth IRA account.

 

Steps for rollovers

We'll likely be asked if we want an in-kind rollover. If the new 401(k) provider we're switching to can't do it in-kind, they'll sell the investments in our old account and move cash to the new one.

What is In-kind rollover?

Any investments that we own in our 401(k) will be moved into another 401(k) account without liquidating any of them.

To start a rollover, we need to get the account information of where we plan to consolidate everything. It could be our new 401(k) account, IRA, or Roth IRA. We can open an IRA for free at companies like Fidelity, TD Ameritrade, or Alto IRA if we don't have one. 

Different IRAs will have different advantages

Next, we'll contact each of the plan administrators of our previous 401(k)s, providing them the account details of where they will be transferring our investments. Most allow direct transfers with an in-kind rollover, and when that's not possible, they'll cut us a check. In that case, we must deposit the check in the rollover account within 60 days, or else we could face tax penalties.

Deciding to roll over
https://www.youtube.com/watch?v=V8uMGxTFxE4&ab_channel=TDAmeritrade
 

Actionable ideas

It's usually a good idea to consolidate your accounts when you get the chance.

Choosing between consolidating in a 401(k), IRA, or Roth IRA depends on your needs and how you want your investments managed. IRAs give you more investment options to choose from; however, you'll have to manage two retirement accounts, your 401(k) at work and your IRA. The Roth rollover is much more situational and would require some tax planning with your accountant.

What's next

Get more out of your IRA

Learn how you can invest your retirement money in alternative assets like fine art, venture capital, startups, real estate, land, and more with an Alto IRA.

Get $50 toward your first alternative investmenthttps://app.getmedes.com/courses/23/lessons/348

Glossary

What is Rollover?

Transferring all cash and investments from one or multiple accounts into another account.

What is IRA rollover?

A 401(k) to IRA rollover offers us substantially more investment choices in our retirement account. 401(k)s typically don't allow purchases of individual stocks or options, while IRAs have no limits in what we can invest in—some folks even end up angel investing in startups out of their IRA. If we want more control over our investments, we can open an IRA with an established brokerage.

What is In-kind rollover?

Any investments that we own in our 401(k) will be moved into another 401(k) account without liquidating any of them.