Rolling over an old 401(k) to a new employer is generally better for simplifying finances, but leaving it may be superior if the old plan has lower fees and better investment options. Key factors include comparing investment choices, expense ratios, loan availability, and creditor protection between the two plans.
Short answer: no. There are no advantages to doing so and several drawbacks. Roll it into an individual IRA and start a new 401k with you new employer.
Some of the disadvantages of rolling over a 401(k) into an IRA include no loan options, a decrease in creditor protection, possibly higher fees, and the loss of a possible earlier withdrawal without penalty.
You can leave your 401(k) with your old employer if the balance is over $7,000 and you like the plan's fees/investments, but rolling it over (to an IRA or new 401(k)) is often better for consolidation, lower fees, and broader choices, though leaving it might suit you if you anticipate needing early access (Rule of 55) or have a small balance under $5,000 (to avoid automatic rollovers). The best choice depends on comparing your old plan's specifics (fees, investment options) with your new plan or an IRA.
You generally have 60 days from the date you receive the distribution (a check or electronic transfer) from your old 401(k) to roll it into an IRA or new employer's plan to avoid immediate taxes and penalties, especially if you're under 59½, though direct rollovers are best as they bypass this 60-day rule entirely. If you cash it out, the IRS treats it as income, and you'll owe taxes plus a 10% penalty if under 59½, unless you qualify for exceptions like the age 55 rule.
The "240,000 rule" (or $1,000-a-month rule) is a retirement guideline suggesting you need $240,000 saved for every $1,000 of monthly income you want in retirement, based on a 5% annual withdrawal rate ($240,000 x 0.05 = $12,000/year or $1,000/month). It's a simple way to estimate savings needs, but it doesn't account for inflation, taxes, market volatility, or other income sources like Social Security, making it a starting point, not a complete plan.
Roll it into a new 401(k) plan
Your savings have the potential for growth that is tax-deferred, and RMDs may be delayed beyond age 73 if you continue to work at the company sponsoring the plan. Generally, you can opt for a "direct rollover" into the new 401(k) that avoids issues with taxes and withholding.
$300,000 can last for roughly 26 years if your average monthly spend is around $1,600. It's often recommended to have 10-12 times your current income in savings by the time you retire. If you want to retire early with $300k, you may need to make some adjustments, as your monthly income will be significantly reduced.
Fees and investments
Rolling over to an IRA can provide a broader range of investment choices and potentially lower fees. However, it's essential to compare the fees and investment options of your current 401(k) plan with those of potential IRAs or new employer plans to make the best decision for your financial future.
Financial pundit Dave Ramsey's advice to pause 401(k) contributions while paying off debt forfeits employer match dollars and halts compounding growth. Staying invested through market downturns is a way to avoid missing the reward of the market rebounding.
A "rollover rule loophole" often refers to using the 60-day rollover rule to access IRA funds temporarily as a short-term, tax-free loan or employing strategies like the Backdoor Roth IRA to bypass income limits, though the IRS scrutinizes these; another "loophole" involves the strict once-per-year IRA-to-IRA rollover limit, which some misinterpret, but rules exist for exceptions like the 72(t) SEPPs for early access, requiring expert tax advice for compliance.
If you're transitioning to a new job or heading into retirement, rolling over your 401(k) to a Roth IRA can help you continue to save for retirement while letting any earnings grow tax-free. You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free.
A Roth 401(k) doesn't make sense if you expect your tax rate to be lower in retirement than it is now, as you'd prefer the upfront deduction of a Traditional 401(k) for bigger savings, though high earners can always contribute to a Roth 401(k) (unlike Roth IRAs) if their employer offers it, making the choice purely about tax-rate arbitrage between current and future income brackets.
To get $1,000 a month from your 401(k), you generally need $240,000 to $300,000 saved, depending on your withdrawal rate, with the common "$1,000 rule" suggesting $240,000 at a 5% withdrawal rate, though this doesn't account for inflation or other income like Social Security. A more conservative 4% withdrawal rate would require closer to $300,000 for the same $1,000 monthly income.
So, if you're leaving a job, don't make these seven mistakes:
Advice spotlight. If you change jobs frequently, rolling over your old 401(k) into an IRA may be more efficient. As you switch employers and accrue new 401(k) plans, it may be more practical to roll over old 401(k) funds into a trusted IRA plan that you've already vetted.
The downside of leaving your 401(k) behind
While the existing balance will continue to grow (or shrink) based on market performance, the absence of new contributions can limit its overall long-term accumulation. (You can and should continue to make contributions to your new employer's 401(k) or your IRA.)