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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?

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

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. 

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.

401(k) to 401(k) rollover

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

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, which means any investments we own in our 401(k) will transfer into another account as they are, without selling any of them. 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.

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, an IRA account, or a Roth IRA account. We can open an IRA for free at Fidelity or TD Ameritrade if we don't have one. 

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.

It's usually a good idea to consolidate our accounts when we get the chance.

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

Glossary

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.

What is 401(k) to 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.

At Archimedes, our goal is to make investment literacy accessible and free for everyone.

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