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5 reasons to roll over an old 401k into an IRA

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Deciding what to do with an old 401k can seem daunting. While there are a few options for you to consider, many people who transfer their money choose to roll over their 401k into an IRA — here’s why:

Key takeaways

  • While cashing out is potentially easier, it may cost you significantly in taxes and penalties.
  • IRAs aren’t tied to any employers so you have more control over where your money is, the investment options available to you, and the fees you pay.
  • 401k-to-401k rollovers are another option, but aren’t always possible and can have a longer lag.

Reason 1

Cashing out your 401k can cost you taxes and penalties if you're not over 59 ½ years old.

While it’s easy to request a 401k withdrawal, the IRS will take a big chunk out of the money you get. Most of the time you’ll pay income tax on the withdrawal in the year that it occurs, plus a 10% penalty on top if you’re underneath what the IRS deems to be “retirement age”.

Rolling over into an IRA allows you to continue saving for retirement in a tax-effective way until you retire – just like most 401k plans.

Reason 2

Transferring your old 401k funds into a new 401k isn't always possible.

Rolling over into a new 401k is not always possible or as easy as rolling over into an IRA. The new company you’re going to might not offer a 401k or have restrictions on rolling over 401k accounts from previous employers. There can also be a lag before you start a new job and when a 401k account is made available to you at that new job.

If it is possible then it’s definitely worth considering. Just be aware that you’ll eventually need to roll over into an IRA when you leave the new employer, or down the line.

IRAs on the other hand, are never tied to your employer. Rolling your 401k over into an IRA allows you to continue growing your retirement savings in a tax-effective way, while also giving you more control over your investments.

Reason 3

You can make sure you're not paying too much in fees.

Excessive fees can erode your savings and make it harder to prepare for retirement. While some 401k providers have very competitive fees, some of them continue to charge high fees and make it hard to find exactly what those fees are. While some IRA providers can do the same, it’s generally easy to see what fees you’ll be paying before opening up an IRA. 

Reason 4

You get to pick a provider that works for you — not your company.

Unlike a 401k where the company chooses the provider for you, you actually get to pick which institution to have your IRA at. So if a seamless digital experience is important to you, you can pick one of the many digital advisors that offer IRAs. If you want a brand-name institution, you can pick one of those too.

Reason 5

IRAs can offer more investment options.

The investment options in a 401k are generally limited by what your company and 401k provider have selected. IRAs though tend to offer a far wider range of investments. If you open an IRA at a brokerage like Schwab or E*TRADE then you’ll be able to pick from a large universe of stocks, ETFs, and other instruments. 

If you want to have your money managed for you in an IRA, that’s fine too. Many institutions offer an “automated IRA” or a set-it-and-forget-it portfolio that’s created and rebalanced for you.  

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