If you are changing jobs, you have three basic choices when handling your existing 401K plan. You can keep the money where it is, letting your now former employer handle the details while safeguarding your investment. You can roll the money over into a new or existing IRA, one that you control. Or you can take the money in your 401(k) plan and spend it.
Unless you are 59 1⁄2 years of age or older, that third option will be costly. Tapping the money in your retirement plan before reaching that magic age will trigger a tax penalty, as well as taxes on the withdrawal itself. So for most workers, changing jobs will mean choosing between the first two options.
So what should you do with your old 401(k) plan? Should you leave it where it is or roll it over into an IRA? This decision can be a complicated one, and there are a number of factors to consider. Here are three reasons to make the move and one reason to leave your old 401(k) where it is.
#1. Rolling It Over Will Give You More Investment Options
While a workplace 401(k) plan can be a powerful tool for retirement savings, most plans have very limited options. The typical plan might include a handful of stock market funds, a bond fund or two and perhaps a target date plan tagged to your expected retirement date.
If you roll over your old 401K into an IRA, you will likely have far more choices. Roll over your 401K into an IRA at a brokerage firm means you will be able to purchase virtually any stock, while moving the money to a mutual fund could give you access to dozens, or even hundreds, of different funds.
This diversification can be very valuable, especially if your 401(k) represents the bulk of your retirement savings. By moving the money, you get savings. By moving the money, you get more choice, and that can be a very good thing indeed.
#2. Consolidating Accounts Could Simplify Your Financial Life
Keeping track of multiple retirement plans can be tedious and time consuming, especially if you have had multiple employers. If you have worked for many different companies, simply keeping track of all those old 401(k) accounts could be a full-time job. By moving those old 401(k) accounts into a single IRA, you will simplify your financial life. Instead of keeping track of three or four separate accounts, you will have a single IRA to monitor, so you can spend your time doing other things.
#3. It Will Be Easier to Track Your Performance
While monitoring the day to day gyrations of the stock market is generally counterproductive and dangerous, you should be tracking your performance at regular intervals. Checking the performance of your investments against benchmarks, like the S&P 500, can reveal how you are doing and let you know if changes may be needed.
Having all your retirement accounts in a single IRA can make performance tracking easier. As long as you know how much was originally invested, all you need to do is check the balance on an annual or semi-annual basis. Doing this calculation on multiple accounts will be far more difficult, giving you one more reason to consolidate your old 401K plans.
As you can see, there are some compelling reasons to take your 401(k) with you when you change jobs, but there are also times when leaving the money in place is the right decision. If you have been happy with the performance of the old plan, it may make sense to keep it in place and continue to receive those benefits.
This is doubly true if the funds you have access to are low cost. It may be hard to match those low costs elsewhere, especially if those low fees have been coupled with high performance.
The decision to roll over your old 401K or leave it in place is a highly personal one, and in the end, it is a decision only you can make. By considering a number of factors, you can make a wise choice for your financial future.
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