When you change jobs or become self-employed, what should you do with your 401(k) at your previous employer? Technically, you have four options: leave it in the old plan, cash it out, move it into a new 401(k) plan, or roll it over to an IRA.
Often, a rollover to an IRA is the best choice and here’s why.
1. Simplify your retirement accounts
When it comes to managing your retirement funds, the fewer accounts, the better. I recommend selecting your preferred brokerage or custodian and keeping most of your investment accounts there so you can see everything in one place. You’ll also get good vibes from seeing your total balance increasing!
It’s best to minimize the number of accounts you have. If you change jobs every few years, and leave old 401(k)s in place with former employers, you will end up with several accounts in different places. That can be risky. There’s a risk of forgetting or overlooking something. Better to consolidate accounts at one custodian as much as possible.
IRS rules allow you to roll multiple 401(k)s into a single IRA. By consolidating and simplifying, you lower your risk and increase your momentum.
2. Keep growing your savings tax-deferred
If you are tempted to cash out an old 401(k), I strongly encourage you not to. When you do a rollover, your money continues to grow tax-deferred, which is the reason you enrolled in a retirement plan in the first place. Even if the 401(k) balance is small, think of it as adding to the pile of retirement savings, and increasing the probability of a good retirement.
A direct rollover to an IRA has no tax consequences. The money goes directly from the 401(k) into the IRA with no tax due. You won’t pay any tax until you decide to start taking the money out in retirement, when, hopefully, you’ll be in a lower tax bracket.
Meanwhile, your invested retirement savings continues to grow.
3. Take control of your investment options
Most 401(k) plans have a very small number of mutual funds to choose from. Sometimes they’re fine funds, sometimes pretty sad. Limited investment options can be a downside of leaving your money in an old 401(k) plan or rolling it into a 401(k) at a new employer.
The great thing about a rollover to an IRA is that you open yourself up to the whole wide world of investment choices. You gain maximum freedom and control of how your retirement savings is invested. Since cost, diversification, and asset allocation are critical to good investing, you’ll be able to dial these in to what is just right for you.
Is a 401(k) rollover right for you?
If you determine a 401(k) rollover is the right move for you, start by opening an IRA, or use your existing IRA. Then, contact the 401(k) plan administrator to initiate a “direct rollover” into your IRA.
It’s always best to get objective advice from a fiduciary financial planner who will look at your financial picture from comprehensive, big-picture point of view. She will help you make the best personal decision about your old 401(k) and guide you through the process.
Would you like advice on doing a 401(k) rollover and how that fits into your financial picture? Contact us for a complimentary consultation or learn more about our services.
About the Author
Gretchen Behnke, MBA, CFP®, RLP®
Gretchen Behnke is a fiduciary financial planner in Plano, TX. Pearl Financial Planning is a fee-only firm providing full financial planning and investment management services to independent professional women and couples. Serving local clients in-person or virtually, and virtual meetings for clients across the country.