3 Reasons for a 401(k) Rollover to a New Employer or IRA

Mar 5, 2024

Making informed decisions about your 401(k) rollover to a new employer or IRA is crucial to your financial security.  

In an era characterized by high job turnover, it is more important than ever for employees to carefully manage their retirement savings.  

With a significant portion of Americans withdrawing money from their 401(k)s when they change employers, understanding the value of 401(k) rollovers is essential to preserving a secure financial future. 

The Startling Reality of 401(k) Early Withdrawal

In a 2022 academic research study, “41.4% of employees leaked by cashing out 401(k) savings at job separation, most draining their entire accounts.”1

This decision can lead to significant consequences, such as tax penalties, reduced retirement savings, and a lack of financial security in the long run. 

The Consequences of Cashing out Your 401(k)

Cashing out a 401(k) can lead to financial setbacks. Instead of cashing out, here are three reasons to consider a rollover to a new employer or IRA: 


  1. Tax Penalties: Most early withdrawals from a traditional 401(k) account, typically before 59 ½, are subject to a 10% penalty on the amount withdrawn. Additionally, the withdrawn amount from a traditional 401(k) will be taxed as ordinary income in the year of withdrawal, which can further erode the value of the savings. For an early withdrawal from a Roth 401(k), the 10% penalty and income tax apply to account gains but not to contributions, which are withdrawn first, tax and penalty-free.2  
  2. Lost Growth Potential: By cashing out a 401(k), individuals lose the opportunity to grow their savings. Over time, this can result in a significant reduction in the total amount saved for retirement. 
  3. Reduced Retirement Security: Cashing out a 401(k) can leave individuals with inadequate savings for their retirement years, increasing the risk of financial insecurity in the future. 

The Importance of 401(k) Rollovers to a New Employer or IRA

In the face of high job turnover, employees must consider the long-term implications of their actions on their retirement savings. A 401(k) rollover is an invaluable tool for maintaining retirement savings when switching employers. This process involves transferring the funds from the old 401(k) account into a new employer-sponsored plan or an individual retirement account (IRA).  

By opting for a 401(k) rollover, individuals can avoid taxes and penalties associated with early withdrawals and ensure their retirement savings continue to grow.

How to Roll Over a 401(k) to a New Employer or IRA

Employees looking to preserve their retirement savings when changing jobs should take the following steps:

  1. Research Options: Review the new employer’s 401(k) plan and consider alternative options, such as rolling the funds into an IRA. Each option has unique features, fees, and investment choices to carefully evaluate. A financial advisor is an invaluable resource when weighing your options. 
  2. Coordinate with Financial Institutions: To initiate a rollover, employees must communicate with their previous employer’s plan administrator and the new plan or IRA provider. Again, your financial advisor can guide you through this transition. 
  3. Maintain Records: Keep a detailed record of the rollover transaction, including the transfer date, the amount rolled over, and the receiving institution. This information will be crucial for tax purposes.  

Making informed decisions about retirement savings is necessary to ensure long-term financial security. 

By choosing a 401(k) rollover instead of cashing out, employees can avoid tax penalties and continue growing their retirement savings, positioning themselves for a comfortable and secure retirement. 

For help with your 401(k) or other retirement savings, reach out to our team at [email protected] or fill out the form below for more information. 
  1. Yanwen Wang, Muxin Zhai, John G. Lynch, Jr., “Cashing out Retirement Savings at Job Separation,” Marketing Science 42, no. 4 (2022): 679, https://doi.org/10.1287/mksc.2022.1404.
  2. “What Are the Roth 401(k) Withdrawal Rules?,” Investopedia, November 10, 2023, https://www.investopedia.com/ask/answers/101314/what-are-roth-401k-withdrawal-rules.asp.

Source: “401(k) Rollovers Can Make or Break Retirement.” FMeX. 2023. 12992.pdf (fmexcontent.s3.amazonaws.com) 

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