Started new job. Rollover previous employer 401k to new 401k, IRA or Roth IRA?

Question

I recently started a new job and have a 401k from my previous employer that I don't know what to do with. Should I roll it into my new employer's 401k, a traditional IRA or a Roth IRA?

Answer 1

You can't roll it over to a Roth IRA without tax penalties.

The best thing to do is roll it to an IRA that isn't tied to work at all. Second best is to roll it into your new employer's 401k. The reason that an IRA makes sense is that it gives you the same tax savings as a 401k, but it allows you to remain in control of the money regardless of your employment status.

Answer 2

I agree with harmanjd – best to roll it over to an IRA. Not only does that afford you better control of your money as pointed out already, but:

If you choose your IRA provider wisely, you can get an account that provides you with a much wider array of investing choices, including funds and ETFs that charge much lower fees than what you would have had access to in an employer 401(k) plan.

But here's one thing to consider first: Do you hold any of your previous employer's stock in your old 401(k)? There are special rules you might want to be aware of. See this article at Marketwatch: If your 401(k) includes your company's stock, a rollover may be a bad move.

Additional Resource:

• 401k Rollover into an IRA or New Employer's 401k

Answer 3

Rolling a 401(k) to an IRA should be your default best option.

Rolling a 401(k) to another 401(k) is rarely the best option, but that does happen. I've done it once when I started a job at a company that had a great 401(k) with a good selection of low-cost mutual funds. I rolled the 401(k) from one previous job in to this 401(k) to take advantage of it. In all other cases, I rolled 401(k)s from previous jobs to my Rollover IRA, which gave me the most freedom of investment options.

Finally, with 401(k)-to-Roth IRA rollovers, it's important to decouple two concepts so you can analyze it as a sum of two transactions:

• the rollover part, which means changing the financial provider; the logic of choosing your provider is essentially the same, whether your money ends up in a "traditional" or Roth IRA
• the traditional-to-Roth conversion, which is a taxable event; the tax consequences are essentially the same whether you change providers at the same time or not.