What to do with your 401k when you change jobs?

My husband is changing jobs and a question came up what to do with his 401k.

Usually this decision must be made within 30-90 days.


After researching this I found that there are four options available:


1. Cash everything out.
That doesn't make much sense. He is still too far away from retirement and there is also no point to pay penalty on early distributions in addition to the taxes. 
If you are younger than 59 1/2, there will be a 10% early-withdrawal penalty on the sum you remove.   

2. Do nothing and leave the 401k with the old job.
You can do it with a minimum balance of $5,000. If it is less, the amount will most likely be paid out to you and you have to make sure to immediately roll it over into a simple IRA or a Roth IRA (dependent on what type of 401k you had. If you had a mix of both, see below).
If your old company will be sold or switches 401k providers, your login information may be changed and you will have to spend time to locate the new information.
Also an additional fee may be charged to non-employees.


3. Roll over to an IRA.
With IRAs there are more investment choices which include stocks and ETFs which are not available in the 401k plan. The fees are lower.
If your 401k is a partial Roth 401k, which are more common in the last years, it will require some more work.
Since 2014 it is possible to roll over the 401ks which have both, pre-tax and post-tax contributions. Those contributions are kept separate and when you log in into your account you can see them listed separately. You can request the pre-tax portion to be rolled over into an IRA and the post-tax portion into a Roth IRA. But the entire amount in your 401k has to be rolled over at the same time. You can not roll them over at different times. 

4.  Roll over into the new employer's plan.
Many new employers accept rollovers. You might check out the investment options and the fees before deciding.

There are two types of rollover: a direct rollover and an indirect rollover.

Direct rollover: The money is transferred from one account to another by the institution without you touching it. You will fill out a form. The company will do the rest.

Indirect rollover: You will receive a check and will have to send it yourself to your new account.
You will need to make sure that you deposit it to the IRA timely. The time limit is 60 days.


If you decide for options 3 or 4, you will have to initiate rollover by calling your 401k administrator to give instructions about the specifics of the rollover. If you rolling over into IRA, you have to have open an IRA account before initiating the rollover.


What will we do with my husband's 401k?
We will wait until we get the information about the new 401k plan and see if the fees and expense-ratios will be comparable with the old plan. They probably will be.

If he decides to roll over into the IRA he will have to do the split because this 401k contains both, pre-tax and post-tax contributions. I am worried about that being done correctly but I probably worry too much. The providers had since 2014 to learn and develop processes how to do it without mistakes/mischaracterizations. They will have to calculate the same pre-tax/post-tax split for rolling over to the new employer's 401k anyway.  

With a rollover into IRA we could save on fees.
The statements of the current 401k shows $75 in fees for the year. He probably will still work for another 21 years until he is 65. If he rolls over into the IRA instead of the new employer's 401k plan, he will save on fees. If the fees are comparable, that will make  about $75x21= $1575.

This is not a very large amount. It probably outweighs the  unnecessary worries about the transfer being messes up.