Sometimes yes, sometimes no. A rollover is often presented as the obvious next step when you leave a job. It is one of four choices, and for some people it is not the best one.
Your four choices
FINRA lists them plainly. You can typically leave the money in your old employer’s plan. Roll it into your new employer’s plan, if that plan accepts transfers. Roll it into an IRA. Or take the cash.
FINRA calls the last one costly, because of taxes and possible penalties. For almost everyone, set it aside.
That leaves three real options, and the right one depends on five checks.
Check 1: Compare the costs
Large employer plans sometimes have very low-cost funds that you cannot buy on your own at the same price. Small plans are often the opposite.
Look up the expense ratio of what you hold now. Then find out exactly what you would hold in the IRA and what that would cost, including any advisor’s fee. A rollover from a cheap plan into an expensive IRA is a pay cut for your savings.
Check 2: Compare the choices
An IRA gives you nearly unlimited investment options. A 401(k) gives you a menu.
More choice is useful if you will use it well. It is also how people end up in products they did not need.
Check 3: Your age
If you leave your job in or after the year you turn 55, money taken from that employer’s plan can avoid the 10% early withdrawal tax. The IRS lists this exception for employer plans. It does not apply to IRAs.
So if you are 55 to 59 and may need the money before 59½, rolling into an IRA can close a door you wanted open.
Check 4: Company stock
If your 401(k) holds your employer’s own stock that has grown a lot, there are special tax rules that can be lost in a rollover. Talk to a tax professional before you move anything.
Check 5: Who is recommending it
An advisor is usually paid nothing on money that stays in your old 401(k), and paid every year on money that moves to an IRA they manage. That does not make the advice wrong. It makes it a recommendation with a paycheck attached.
Ask: “How are you paid if I roll this over, and how are you paid if I leave it?” Then ask them to compare the costs for you in writing.
A rollover can be right. Just notice who gets paid when you say yes.
If you do roll over, do it the clean way
Ask for a direct rollover, where the money goes straight from the plan to the IRA.
If the plan pays the money to you instead, the IRS says the plan must withhold 20%, and you have 60 days to deposit the full amount into the IRA, including the 20% you did not receive. Miss the deadline or come up short, and that part is taxed.
A direct rollover avoids all of that. It is not a taxable event.
The short version
Leave it if the old plan is cheap and good, or if you are 55 to 59 and may need access.
Move it to the new employer’s plan if that plan is good and you like having one account.
Roll it to an IRA if the old plan is expensive or limited, and you know exactly what you will hold and what it will cost.
Related questions: why 401(k) fees run high, should I roll my 401(k) into an annuity, how to switch advisors without a tax bill and how to check if your advisor is a fiduciary.
One question for this week: what is the yearly cost of the fund that holds most of your old 401(k)? You need that number before any other part of this decision.
As always, if you want to talk any of this through, the door is open. Genti