If you have money in a 401k account and are in the process of changing jobs, be aware that there are a number of benefits to establishing a rollover 401k IRA account. In almost all cases, rollovers are better than withdrawals or payouts, as they allow you to continue saving money for your retirement and to defer taxes on the money you’re saving in 401k rollover account. If, on the other hand, you receive the money from your old 401k account, you’ll have to pay taxes, as well as additional penalties for early withdrawal if you haven’t reached minimum retirement age of 59 ½.
A 401k rollover to IRA allows the money from your old 401k account to move into a new IRA – either one that’s established through your new employer or one that you set up on your own. There are different types of rollovers, but the basic principle is that the money moves from one qualified plan to another. Provided you set up the rollover correctly, your money will continue to grow for retirement and you will continue to enjoy tax deferred status on the money that was previously invested in your 401k, as well as any money earned through your 401k investments.
Establishing a rollover 401k IRA account has another exciting advantage – the ability to choose from a wider selection of investment options (provided you elect to open a privately held IRA). Most employers offer a limited selection of investment vehicles in their employer sponsored plans, as this has been shown to lead to employee confusion and, consequently, lower participation rates. Unfortunately, this can limit your potential rate of return. Moving your retirement funds to a privately held IRA gives you access to many potential investments, including stocks, mutual funds, ETFs, bonds and more, which may lead to increased growth in your portfolio.
Another benefit of a 401k rollover is it enables you to consolidate all of your funds under one account, which is typically easier for record keeping purposes. This also has the advantage of giving you more money to work with within a single account. Some IRA investments, for example, require a minimum amount of money before you can invest. If you have all of your money in one place, it’s more likely that you’ll have the amount needed to make the investments you desire.
Taking advantage of a 401k rollover may also allow you to move your money from your old 401k into a newer type of account. In general, 401K accounts have been around for a while, and the structure of your 401k may no longer be in line with your investment goals. Any time you change jobs, it’s a good idea to review your financial situation to make sure you’re on track to reach your goals.
For example, hopefully your new job brings with it increased pay. Does it make sense to increase your IRA contributions? Or should you keep your IRA contributions where they were and invest money in a different vehicle? These are the questions you may want to consider with the help of your tax accountant or a financial planner before initiating a rollover from 401k to IRA.