Deciding what to do with your 401(k) retirement plan when you leave a job can be intimidating. Unless you have an extreme hardship and need to cash out your 401(k), it's almost always best to rollover your old retirement plan into a rollover IRA. Once you understand why—and how—to rollover your old 401(k) into an IRA, the process is easy.
If you contributed money to a 401(k) or another employer-sponsored retirement savings account and then leave that employer, you eventually need to decide where to move the money in that account. You'll want to move the funds into an account that you can control without going through your former employer. Since 401(k) accounts are designed to provide tax incentives to save for retirement, cashing out is almost always a bad idea. Not only must you pay federal income taxes, state taxes, and a 10% early withdrawal penalty, if you spend that money now rather than leaving it invested, you'll lose out on decades of compound interest.
The smart choice may be to rollover an old 401(k) into an IRA in your own name. When you do a direct rollover (meaning the money from the old account is sent directly to the new account), you do not have to withhold nor pay any taxes on the transaction. It is also important to review the annual service fees associated with the 401(k) plan and rollover IRA account as each is subject to fees, sales charges, or other limitations.
Why Rollover Your 401(k) to an IRA?
The biggest benefit to rolling over your old 401(k) to an IRA rather than a new 401(k) is the control you will have over your investments. Few employer-sponsored retirement plans give you unlimited investment options. In fact, many 401(k)s only provide a handful of mutual funds and other investment options.
With most IRA accounts, you can invest your money in almost anything you want including cash, stocks, mutual funds, index funds, bonds, and more. Even if you're not interested in actively managing your investments today, you may want that control down the road.
Need help choosing a rollover option?
When it comes to the money in your retirement plan account, making the right investment decisions is key to your long-term financial success. The funds you invest in, how much and when you invest, and how often you change your strategy can be critical to your quality of life in retirement. That's because the right investment decisions made over time can affect your retirement income and, consequently, the kind of lifestyle you'll be able to enjoy.
Let our Rollover Counselors help you understand retirement
Rollover Counselors will speak with you about your goals provide and help you understand your options.
- Fundamentals of investing—discover essential concepts of smart retirement investing.
- Understanding mutual funds—find out how they work, what they are, and how to invest in them.
If you have any questions about your retirement planning, please feel free to call a Rollover Counselor: