When to Roll Over Your 401(k) Plan Into an IRA


When you move from one place of employment to another, you’ll probably want to at least give some careful thought to taking the funds in your old 401(k) plan with you. In many cases, rolling them over into an IRA is the best choice.

But then again, sometimes it’s better to leave your funds in the 401(k) even if you no longer work there. But how do you know which option is the best choice? What’s the process if you decide to follow through? It’s probably simpler than you think.

Why Should You Roll Over Your 401(k) Plan?

Your old employer-sponsored plan has the best interest of company employees at heart. When you leave the company, you no longer fit that criterion. So there’s no reason to expect that your desires will ever again play a role in the plan administrator’s decisions.

When you take your money with you, you regain control over your money, says certified financial planner, Jim Blankenship for U.S. News & World Report. You choose which is the right IRA, and this creates more choices than leaving money back at the old plan.

Blankenship adds, “Employer plans only have a limited list of mutual funds to choose from. In an IRA, you can invest in just about any fund, stock, bond, or an ETF you would like to.”

When to Leave Your Employer-Sponsored Plan

The grass isn’t always greener just because it’s new. Sometimes the best choice is to keep your money right where it is. If your old plan has great investment options, you may lose them if you move to an IRA.

Maybe a bigger reason to stay with your old plan is no-fee access to your money sooner than if you transfer it. Once you roll your 401(k) into an IRA, you lose that ability to withdraw the funds penalty-free (not tax-free of course) at age 55.” Just remember that you’ll pay taxes upon withdrawal.

How to Make the Switch

If you decide that an IRA is the right choice for you, it’s not really a difficult process to make the move. Just be sure to have the IRA in place before you initiate the transfer. If not, the 401(k) plan administrator will hold back about 20 percent for taxes as if you’re withdrawing all of your money and not reinvesting it.

Let the administrator know that you’re making a “direct rollover,” advises Blankenship. You might receive the check, or the new custodian might. Either way, the funds in your 401(k) will be directed to the new custodian. If the check comes to you, you have 60 days to make the deposit.

There’s no single right or wrong way to handle an orphan 401(k) plan. It’s as individual a decision as any other financial decision that you’ll make. If your current plan is great, you like the administrator, and you are pleased with the performance of your investment, it may make sense to leave your funds where they are. But if you want to start fresh with a new plan and new choices, rolling over into an IRA puts you back into a position of control.

Planning for the future is sometimes confusing because many people aren’t financial experts. But that doesn’t mean you’re stranded with few or no options. NewRetirement is there to help, whether it’s finding an advisor, determining how much you’ll need to retire, or choosing the right investments for your money.

Check out the NewRetirement retirement calculator to learn more about your current financial fitness and get some advice on ways that you can improve. It only takes a few minutes and doesn’t cost a penny, but what you learn could be invaluable.

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