How Does a 401k Rollover Work?

You are leaving a job where you have a 401K

A 401K rollover is initiated when you are leaving a job where you have contributed to a 401K plan. Upon leaving your company you three main options: cash out your 401k, keep it in your old company's plan or move it to another account that qualifies for tax free interest gains. The movement of your 401k to a different account is the "rollover."

You can rollover to a new 401K or an IRA

While it may be tempting to cash out a 401K early, it usually a very bad idea, since you are subject to tax, and an early withdrawal fee. Rolling over your account is usually the best option, unless your old company has a great 401k plan with low fees. If you are moving straight to a new job that offers a 401k plan, you can roll your plan right into the new one. You can also choose to roll your 401k into an IRA (investment retirement account).

The best place to rollover a 401K depends on preference

If you choose to roll over your 401K, do not immediately assume your new company's plan is the best place to put your money, just because you will likely be contributing to that plan in the future. Fees charged on accounts can take a large bite out of savings, and you will often be able to find lower fees in an IRA. An IRA also can allow a greater level of investment control to you, so if you don't like the funds your 401K invests in, you can choose a portfolio more to your liking with an IRA.