Shelton 401(k) Pro-Tip #17: Know Your 401(k) Rollover Options

One of the many great things about 401(k) plans is that your assets are usually “portable” when you leave a job, meaning you have the ability to take your benefits with you. But what should you do with that pool of retirement assets when the time comes?

Rolling over your 401(k) to a traditional IRA is one way to go, and probably the easiest, but you should consider all possibilities before making a decision.

In a nutshell, rolling over your 401(k) means moving your retirement assets into another account, typically a traditional IRA. These accounts have similar features, not least of which contributions are made on a tax-deferred basis, and both allow you to take money out penalty-free after you turn 59 1/2.

There are other options, however. Here is a quick look at three other options available to you:

1. Leave it alone

As long as your account’s value is greater than a certain threshold, you are allowed to leave your money invested in your former employer’s plan. And, if you are happy with your 401(k)’s performance and investment options, there is nothing wrong with doing this.

2. Combine it with your new employer’s plan

If your new employer offers a 401(k), you probably have the ability to move your old 401(k) into your new plan. Doing so can make perfect sense, but make sure to compare the fees charged by your new plan’s fund options with your old ones. If your old plan is cheaper, it is probably best not to transfer the funds.

3. Cash it out

Unless you are suffering an extreme financial hardship and have no other options, this is almost never a good idea. Beyond having to pay taxes and penalties, you will effectively be robbing your future self. As an example, if you are 35 years old, in the 25% tax bracket, and have $25,000 in your 401(k), cashing it out would net you $16,250. In contrast, leaving that amount invested until you are 65 could result in an account value of more than $190,000, based on 7% annualized returns.

All in all, a rollover IRA is usually the best option for most folks. But there’s nothing wrong with leaving your account alone or moving it into your new employer’s plan. The most important point is to leave it invested. Whatever you do, do not cash out unless you have no other alternative.

Managing your 401(k) across your career is a smart way to establish a strong retirement nest egg. Check out our educational videos on our page, 401(k) Educational Videos.