Your rollover options
When leaving your job, you have several options for your retirement accounts. Choose wisely to avoid taxes, penalties, and lost growth.
| Option | Pros | Cons | Best For |
|---|---|---|---|
| Leave with old employer | No action needed, keep investments | Higher fees, limited control, complexity | Large balances, good plan features |
| Roll to new employer | Consolidation, potential loan options | Limited to new plan's investments | Good new plan, want simplicity |
| Roll to IRA | Maximum investment control, lower fees | No loan option, loss of creditor protection | Want control, lower fees important |
| Cash out (avoid!) | Immediate access to money | Taxes, penalties, lost growth | Emergency only, very small balances |
US rollover process (401k/403b → IRA/new plan)
Choose your destination
New employer 401(k) for consolidation, or Rollover IRA for maximum control and investment options
Open the receiving account
Set up IRA or enroll in new employer plan before initiating transfer
Request direct rollover
Use trustee-to-trustee transfer to avoid taxes and 60-day deadline
Handle Roth money separately
Roth 401(k) → Roth IRA; Traditional 401(k) → Traditional IRA
Invest the funds promptly
Don't leave money sitting in cash; implement your target asset allocation
Avoid the 60-Day Rollover Trap
- • 20% withholding: Indirect rollovers trigger automatic tax withholding
- • 60-day deadline: Must complete rollover within 60 days or face taxes + penalties
- • Make up withholding: Must deposit 100% of original balance, including withheld amount
- • Solution: Always request direct trustee-to-trustee transfers
Canada rollover process
RRSP/Group Plan Transfers
Direct transfer (T2033 form)
Move funds directly between RRSP accounts without tax consequences
Group RRSP → Personal RRSP
Keep contribution room, maintain tax-deferred status
DPSP (Deferred Profit Sharing Plan)
Can transfer to RRSP or take as taxable income
Locked-In Pension Funds
Pension → LIRA (Locked-In Retirement Account)
Locked-in funds preserve pension-like restrictions
Eventually converts to LIF
Life Income Fund with minimum/maximum withdrawal rules
Provincial differences
Unlock provisions vary by province and plan type
Defined benefit pension decisions
Keep the Pension
- • Guaranteed income: Predictable monthly payments for life
- • Inflation protection: Many pensions include cost-of-living adjustments
- • Survivor benefits: Income continues for spouse
- • No market risk: Payments unaffected by market downturns
- • Creditor protection: Generally protected from creditors
Take Commuted Value
- • Investment control: Potentially higher returns if well-managed
- • Flexibility: Access to funds if needed
- • Estate benefits: Remaining funds pass to heirs
- • Portability: Money moves with you
- • Interest rate sensitivity: Higher rates = higher lump sum
Commuted Value Decision Factors
Interest rate environment
High rates increase lump sum values; low rates favor keeping the pension
Health and longevity
Poor health may favor lump sum; excellent health favors keeping pension
Other retirement income
Significant other sources may make lump sum more attractive
Common rollover mistakes
⚠️ Costly Pitfalls to Avoid
- • Taking indirect rollovers: 20% withholding and tight 60-day deadline
- • Cashing out: Immediate taxes + 10% penalty + lost compounding
- • Missing the 60-day deadline: Entire amount becomes taxable
- • Mixing account types: Roth and traditional funds must stay separate
- • Forgetting about loans: Outstanding 401(k) loans may become due immediately
- • Losing creditor protection: IRAs have weaker protection than employer plans in some states
Special situations
Company Stock (NUA Strategy)
Net Unrealized Appreciation: Pay ordinary income tax on cost basis only
Future gains taxed as capital gains when sold
Only beneficial for highly appreciated company stock
Requires taking distribution, not rolling over the stock
Outstanding 401(k) Loans
Usually must be repaid immediately upon termination
Unpaid loans become taxable distributions
Some plans allow continued repayment after termination
Check plan documents and consider repaying before leaving
Multiple Employer Changes
Consider consolidating all old 401(k)s into one rollover IRA
Simplifies management and reduces fees
Easier to maintain target asset allocation
Less paperwork and fewer statements to track
Tax implications and timing
| Action | US Tax Consequences | Canada Tax Consequences |
|---|---|---|
| Direct rollover | No immediate tax | No immediate tax (direct transfer) |
| Indirect rollover (60-day) | 20% withholding, must replace to avoid tax | N/A - use direct transfers |
| Cash out | Income tax + 10% penalty (if under 59½) | Full amount added to taxable income |
| Leave with employer | No immediate tax | No immediate tax |
💡 Pro Tips
- • Start early: Begin rollover process before your last day of work
- • Keep records: Save all rollover documentation for tax purposes
- • Compare fees: Employer plans sometimes have lower fees than IRAs
- • Consider timing: Market volatility may affect when you complete rollovers
- • Get help: Complex situations benefit from professional advice
Frequently Asked Questions
Can I roll my Roth 401(k) to a Roth IRA?
Yes, this is generally the best option. Roth 401(k)s have required minimum distributions, but Roth IRAs don't. Rolling to a Roth IRA gives you more flexibility and eliminates RMDs during your lifetime.
What if my new employer's plan has lower fees?
Lower fees can make a significant difference over time. If your new employer's plan has institutional-class funds with expense ratios significantly lower than what you can access in an IRA, rolling to the new plan may be worthwhile.
Do I owe taxes on a direct transfer in Canada?
No, direct transfers between registered accounts (RRSP to RRSP, pension to LIRA) don't create taxable events. Always use the T2033 form for direct transfers to maintain tax-deferred status.
Should I take my pension as a lump sum?
This depends on interest rates, your health, other retirement income, and investment experience. High interest rates increase lump sum values. Consider consulting an actuary or fee-only financial planner for complex pension decisions.