4 Benefits of Rolling Your 401(k) Into an IRA

If you contribute to a 401(k) at work, what happens to the money in your account when you retire, get a new job or otherwise leave the company?

All the money you’ve contributed to your 401(k) is yours to keep. And, if your employer contributed a match, you are entitled to keep that as well, so long as you are “fully vested.” Different plans have different vesting schedules; for example, your company might require you to work X number of years before you are fully vested. If you leave before becoming fully vested, you may not be able to keep all the employer contributions. 

What You Can Do with Your Old 401(k)

When you separate from your company, there are four ways you can handle your 401(k):

1. Cash out of the plan
2. Leave the money in the plan
3. Roll over into your new employer's qualified plan
4. Roll over to an IRA

The cashing out option is rarely a good idea. In fact, most advisors consider cashing out one of the top retirement planning mistakes to avoid. Though leaving your money in your former employer's plan or rolling it over to a new employer plan are both fine options, don't disregard the opportunity to roll your funds into a rollover IRA. A rollover IRA comes with its own set of strategic benefits and when executed properly, ensures you don't trigger any negative tax consequences.

4 Benefits of a Rollover IRA

There are several compelling reasons to consider rolling your old 401(k) over into an IRA.

One big advantage of an IRA rollover is the continuation of the tax-deferred treatment you had at your workplace retirement account. What's more, no tax is owed on a properly executed rollover, although it is a reportable transaction to the IRS.

Within a 401(k) plan, your investment options are limited to the choices provided by your plan custodian and employer. Often, these choices are sufficient, but rarely are they extensive. With a rollover IRA, you can choose to put your money in virtually any mainstream investment imaginable.

Some employer-sponsored 401(k) plans have high administrative fees. These fees are not enough to make contributing to the plan a bad deal, but it makes more sense to keep those retirement assets growing in a similarly tax-advantaged option. IRAs tend to have lower fees, if any, depending on where and how you open the account.

Instead of juggling multiple former workplace retirement accounts as you switch jobs over the course your career, consistently rolling over your plans to a single rollover IRA reduces complexity. You can look at one account statement and see the balance, recent performance, and investment selections of most of your retirement savings from one account.