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The Easy Guide to Managing your Retirement Plan Rollover

So You Left your Employer, Well Don’t Leave Your Money Behind;
The Easy Guide to Managing your Retirement Plan Rollover

During your entire working career, it can be expected that you will change employers a few times before you ultimately find a place that feels like home. When you do decide to move on, it raises the question of what does one do with your retirement money at your now-former employer? We have alleviated some stress for you by breaking down the process of figuring out the appropriate financial route to take after departing from an employer.

Before you can land on the right decision for maneuvering your retirement plan, which is most likely a 401(k), you’ll need to know if you are permitted to leave it with your prior company? Some employers encourage you to move your money, while others promote for you to leave it behind; and a few older pension plans may require the funds to remain in the plan with select windows of opportunity to either turn on the income or move the funds.

Essentially you have four alternatives: leave it in the current plan, transfer to your new employer’s plan, roll it over to an IRA (Traditional and/or Roth), or cash it out.

Leave It

Listed are the considerations that you will want to focus on with your 401(k) plan before deciding to leave it with your prior employer or move it.


  • Easy – since the funds are already there and invested, it is sometimes easier to do nothing and let it ride.
  • Stock – some employers allow you to invest directly into their publicly traded stock, offering you an opportunity to participate directly in their performance.
  • Costs - you will want to benchmark your previous plan versus your new plan to see which offers lower expenses.
  • Returns – despite the cost, focus on the net rate-of-return between funds as a true measure of performance.

Believe it or not, based upon the size of the plan and other factors, separate plans could have the same exact fund that you could invest in but offered in a different share class with lower expenses resulting in a higher net rate-of-return.


  • Contributions - by having a plan at a prior company it is considered frozen, which means you can no longer add money since you can only contribute to a 401(k) through payroll deduction.
  • Forced-cash out - it is a permissible rule that if your plan balance is less than $1,000, the employer has the authority to cash you out automatically and send you a check. You’ll then have 60 days to decide to roll the money over into an IRA or to a new 401(k) to avoid being taxed, and if you’re under the age of 59½, you will also incur a 10% penalty.


  • Forced-IRA – another rule allows an employer to automatically roll your balance to an IRA that runs parallel with the plan if your plan balance is $1,000-$5,000.


Another strategy to review while deciding where to house your retirement assets is transferring your current 401(k) balance to your new company 401(k) plan, if one exists.


  • Organization - by keeping your stuff in one place, you’ll gain ease of administration, access, as well as not losing track of older plans.
  • Contributions – after you satisfy the plan’s waiting period, you will able to contribute new funds to the same pile allowing you to increase your retirement savings and gain some tax advantages.
  • Match – if the new plan provides a match, be sure to contribute enough to capture the free money…but do not stop there, contribute what you can afford.  Just think that the more you add, the sooner you will be able to hit your retirement accumulation goal.
  • Diversification – the new plan investment lineup may provide access to other funds that will help to round out your overall allocation.
  • Cost – as mentioned earlier, the new plan may provide access to lower-cost funds yet remain focused on net-performance.
  • Loans – if permitted by the plan and you need quick cash, you can borrow 50% of your vested balance up to $50,000, and you essentially pay yourself back the interest.
  • Rollovers - be aware that not all 401(k) plans accept rollovers from prior plans, most do, but some don’t.

NUA: if you have company-specific stock in your plan, you should consider the planning strategy of NUA (Net Unrealized Appreciation). This permits a participant to distribute the company’s specific stock to themselves directly and pay ordinary income tax on only the cost basis. Provided the stock is held for over a year, the gain is treated as long-term capital gain, which is currently taxed at a lower rate than ordinary income.  Other factors need to be financially modeled out.  Simply do not walk by this valuable opportunity until you fully explore if this is advantageous for you!


In terms of rolling over your 401(k) into an IRA, there are two flavors, Traditional and Roth.

Remember, retirement plans have three distinct tax benefits: tax-deduction on contributions, tax-deferral on investment gains, and tax-free withdrawals. The catch is you can only have two of the three in the same retirement plan. 

  • Traditional IRA/401(k) - takes advantage of the tax-deduction upfront and the tax-deferral. Any of your withdrawals will be taxed as ordinary income as you withdraw them.
    As a tax strategy, many people contribute to a Traditional plan while working and living in one state with plans to eventually move to a lower or no income tax state later upon retirement. When they withdrawal funds allowing for either a lower state income tax or there is no state income tax at all if your domicile is appropriately moved.
  • Roth IRA/401(k) - does not allow for an upfront tax-deduction on contributions, but they do take advantage of the tax-deferral of gains and most importantly benefit from tax-free withdrawals. The withdrawals are tax-free provided certain criteria are met. In any case, you must be at least age 59½.
    • Roth 401(k) balances can be drawn on directly tax-free.  Any balance remaining in a Roth 401(k) plan (not a Roth IRA) will require a minimum distribution starting at age 72.
      Caution: moving a Roth 401(k) balance to a Roth IRA is a one-way street.  Once moved, funds rolled into a Roth IRA cannot be moved back into a Roth 401(k) as Traditional funds can be rolled back and forth.
    • Roth IRAs do not require a minimum distribution at any age allowing for further tax-free compounding and control of the timing as well as the amount of a withdrawal.  However, they do require to be established for a minimum of 5 years or longer before tax-free withdrawals can occur. 
      Roth IRA placeholders are often created while working to allow for the 5-year holding requirement to be achieved.  A Roth 401(k) plan balance can then later be rolled into an already aged Roth IRA plan and subsequently be immediately withdrawn from tax-free.

Now that you have a more thorough understanding of both Traditional and Roth 401(k) plans and IRAs, here are some thoughts for you to consider with rolling funds into an IRA. 

  • Costs – still play a factor and should be carefully weighed.
  • Returns – net investment performance remains the key factor as we like to say, “it is only a cost in the absence of value.”
  • Loans – IRAs do not permit loans.
  • Diversification – each 401(k) plan has a select number of investment alternatives to choose from which are usually limited.  By moving to your own self-directed IRA, you can expand the universe of available investments to consider, including many that are not permissible inside a 401(k).
    An investment risk reduction strategy, and one that can restore the defined benefit feature of a defined contribution plan, can be gained by utilizing an annuity with guaranteed principal and growth features leading to a guaranteed income stream that can be structured as single or joint-life if married.  While typically a higher-cost strategy, it could make financial sense for a portion of your funds.  Other unique riders such as death benefits, the return of principal, and long-term care benefits can be added for an additional cost.
  • RMD – Traditional IRAs have required minimum distributions (RMD) starting at age 72, while a Roth IRA does not share that same requirement as a Roth 401(k).  Traditional 401(k) plans also have an RMD starting at age 72, unless you remain working full time which then permits you to delay your RMD until you fully retire.
  • NUA – as noted above, any company stock is distributed directly with you paying ordinary income tax on only the cost basis allowing gains on the stock to be converted to long-term capital gain treatment after the one-year holding requirement.  Other funds from the same plan can be rolled into their respective Traditional or Roth IRAs to prevent further taxation.


The final alternative to consider is to request a cash-out or take the money and run! Yes, you will first be responsible for any income tax liability. However, you could request the 401(k)-plan sponsor or provider send you a check while withholding income taxes.  It is simple, but there are a couple of things to prepare yourself to address before you pack your bags.

  • Penalty - if you are under the age of 59½, you’ll have to pay the ordinary income tax due on any Traditional assets or Roth assets, plus incur a 10% penalty.
  • Deferral – by distributing your funds all at once, you lose any future tax-deferred growth.
  • Taxes – aside from the added income taxes on your retirement plan distribution itself, the extra increase to your income may force you into a higher bracket and reduce or eliminate other deductions, exemptions or exclusions.

We strongly suggest you seek professional guidance when making pivotal life-changing decisions with high stake consequences. At Wealth by Design, we specialize in helping people compare their alternatives during crucial financial moments such as managing their retirement assets and we collaborate with your other advisors in the process allowing you to make well-informed decisions rooted in financial facts. Reach out today for us to help you design your financial route on your road to retirement.

Authored by; Craig C. Bartlett, CFP®, CRPC®, CBEC®

Associates of Wealth by Design are registered representatives of Lincoln Financial Advisors.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor.  Insurance offered through Lincoln affiliates and other fine companies. Lincoln Financial Advisors does not provide legal or tax advice. Wealth by Design is not an affiliate of Lincoln Financial Advisors. CRN-3485755-030921