Whenever you change jobs, you usually have the option to rollover your 401(k) to an individual retirement account (IRA). Other options typically include cashing it out, leaving it where it is, or transferring it into your new employer’s 401(k) plan (if they have one).
Rarely, if ever, should you cash out your 401(k), so be very careful if you decide to do that. The two most common choices are transferring your old 401(k) to your new employer or leaving it where it is. But are those your best options? We don’t think so. Generally, we believe your best choice is to rollover your 401(k) to an IRA. Here are the top reasons why:
More Investment Options
Most 401(k) plans are limited in the investments you can make. Most likely, your 401(k) gives you between 15-25 mutual funds you can invest in, and that’s it. This is in large contrast to an IRA, where you would have thousands of investment choices at your fingertips. An IRA will make it easier for you to invest in securities that accurately match your investment profile.
Fewer Restrictions
In an IRA account you can buy and sell your investments anytime you want. However, many 401(k) plans restrict how often you can make changes to your portfolio. In general, 401(k)’s are susceptible to a greater number of government regulations than IRA’s. The fewer restrictions and rules you have to worry about, the better.
Keep your money with you
Why should your money stay with your old employer after you leave? It shouldn’t. You’ll have clearer access to your account if you rollover your 401(k) to your own IRA. Communication regarding your 401(k) is often distributed through company email. If you’re no longer at the company, you might miss out on important communications that impact your money. Why take that chance? You can avoid the issue entirely by rolling over your old 401(k) to an IRA.
Lower Fees and Costs
In many cases, rolling over your 401(k) to an IRA will save you money on fees and costs. Most 401(k) plans charge administrative fees, whether you still work for the company or not. When you rollover your 401(k) to an IRA, you’re no longer responsible for paying these fees. In addition, mutual funds found in 401(k) plans typically charge higher fees than comparable funds you’d have access to in an IRA.
A 2018 study found the average cost for a 401(k) to be 2.2%, or $2,200 for every $100,000 invested. You could potentially save more than $10,000 over 5 years when you rollover your 401(k) to an IRA.
The Bottom Line
While every person’s individual situation is different, general conditions favor rolling over your 401(k) to an IRA after you leave your company. Feel free to contact us if you are unsure what you should do with your old 401(k).
Don’t want to miss anything?
Subscribe to our monthly newsletter for market insights.
