Should I Rollover My 401ks?

If you have a trail of old 401(k)s, you may be wondering "should I rollover my 401(k)?". See the options you have with your old 401(k) and the pros and cons of rolling over to a 401(k) or IRA.

4 min read

Moving into a new workplace comes with mixed emotions- from adjusting to the new routine, fitting into your new position, adjusting to a new city, to making new friends. As you settle in your new workplace, you should consider what to do with your old 401(k) plan. The short answer is: Yes, you should rollover your 401(k)s. Rolling over your 401(k) to an IRA can help you enjoy the benefits of an Individual Retirement Account (IRA) such as a wider investment selection, low-cost investment options, Roth option, and cash incentives offered by brokerages. Before rolling over your 401(k), you should compare the options you have to determine the option with the lowest fees and best investment options.

Whether you want to leave your retirement savings where they are or you want to roll over your 401(k), you should figure out the options you have, and the pros and cons of rolling over your 401(k). Making a bad decision may cost you a sizable portion of your savings, which could otherwise help you in your retirement years.

What Can You Do With Your Old 401(k)?

If you have changed jobs several times in the past years, chances are that you have several old 401(k) idling somewhere. As you bid your former employer goodbye, you should figure out what to do with your 401(k) plan to help you safeguard your retirement years.

Here is what you can do with your old 401(k)

Leave the money where it is

Some employers may allow you to retain your 401(k) after you exit the company, but there are certain requirements you must meet. For example, if you meet the minimum balance requirement, you don’t have to take any action to have your employer keep your 401(k) money. However, you will no longer contribute to the account, and you will lose the privilege of receiving company communication regarding the employer’s retirement plan.  

One of the benefits of keeping your 401(k) savings with your former employer is protection against creditor lawsuits. Federal laws prevent creditors from accessing your 401(k) money to pay off debts owed, even if you declare bankruptcy. Also, retaining your 401(k) with your former employer means that you will continue investing in familiar investments before you are ready to make the next move.

Rollover 401(k) into a new 401(k)

If your new employer has a 401(k) plan and accepts 401(k) rollovers, you can transfer your funds to the new plan for easier management of your retirement savings. This option helps keep track of your retirement savings, instead of struggling with a trail of old 401(k)’s. If you choose a direct 401(k) transfer from the old employer’s plan to the new employer’s plan, the funds will not be subjected to income tax or early withdrawal penalty.

Before moving your assets to your new employer's plan, you should evaluate the 401(k) investment options available to determine if they fit your investment style. Consider the type of investments available, fees and costs involved, management fees, etc. If the portfolio options are not appealing, you should consider rolling over your 401(k) to an IRA to get more investment options.

Rollover 401(k) into an IRA

If you are moving from job to job as you climb up the pay scale, a rollover IRA is a great option to grow your retirement money. You can use an IRA to consolidate your 401(k) money in a single account for easier management. Generally, IRAs have a wider investment selection and lower fees, and you can open an account with a Robo-advisor to access low-cost investment options that charge less than 0.25% as annual fees. IRAs have a wide selection of investments that you can use to create a well-diversified portfolio.

When moving funds to an IRA, you can choose to make a direct or indirect rollover. Direct rollovers are the most convenient, and they involve a custodian-to-custodian transfer where the 401(k) plan administrator sends funds directly to the IRA. There are no taxes and penalties involved, and the transfer is completed in a few days or weeks, depending on the 401(k) plan administrator.

The alternative option is an indirect rollover that must be completed within 60 days of funds transfer. The 401(k) plan administrator will send you a check equivalent to your 401(k) balance, and you are responsible for depositing these funds to the IRA within the defined period. If you fail to meet the 60-day window, you will owe income taxes on funds, and a 10% penalty tax if you are below 59 ½.

Cash out the account

You can also choose to cash out your 401(k), but this is generally not recommended. If you are younger than 59 1/2, you will face an early withdrawal penalty of 10% in addition to owing income taxes on the amount you withdraw. If you're over 59 1/2, you'll still owe taxes on the amount you withdraw. Furthermore, cashing out your 401(k) can significantly reduce the amount of money you'll have for retirement.

Why You Should Roll Over Your 401(k)

Once you have left your job, rolling over your money into an IRA presents various benefits that you will not find in a 401(k). Knowing the pros of rolling over your 401(k) can help you know if you are making the best move with your money.

Here are some pros of rolling over your 401(k):

Wider investments pool: A 401(k) limits you to stocks and bonds. With an IRA, you have access to a wider investment selection that includes exchange-traded funds, bonds, stocks, REITs, mutual funds, and index funds.

Low-cost investment options: If you open an IRA with a Robo-advisor, you can find investments that charge less than 1% in annual fees. Robo-advisors are cheaper than human-managed investments, and you can find investments that charge 0.25% to 0.5% in annual fees.

Cash incentives: Some financial institutions offer cash incentives when you roll over your 401(k) to their IRA. These incentives can be anywhere from $200 to $2500 depending on the size of your retirement savings.

Roth Option: With a Roth Option, you pay the taxes when you contribute, and there will be no taxes owed when you withdraw your funds in the future. While you don't avoid the taxes, it helps you get a tax-free payout in your retirement years.

Why Rolling Over Your 401(k) May Be a Bad Idea

Even with all the benefits that come with moving your 401(k) funds to an IRA, there are certain scenarios when rolling over could be a bad decision. Here are some of the benefits you lose when you rollover your 401(k):

No IRA Loans: Unlike in a 401(k) where you can take a loan on your savings, you cannot take a loan on your IRA money. However, if you want to pay for qualified college expenses, make a down payment for your first home, pay medical expenses or get a hardship allowance, you may qualify for a penalty-free distribution from your IRA savings.

Limited Creditor Protection: 401(k) protects your savings from creditor judgments, and creditors cannot access your retirement savings or assets to settle debts, even if you declare bankruptcy. However, with IRAs, you get limited creditor protection, and the amount of protection you receive varies depending on the state.

Early Access to Retirement Benefits: When you rollover the 401(k) into an IRA, you will have to wait until you are 59 ½ to withdraw your retirement savings without paying a penalty. However, with a 401(k), you can withdraw your savings at age 55 without paying a penalty tax if you leave your current employer for another job or retirement.

Potential Fees: Rollovers may incur fees, such as administrative and account transfer fees, that can eat into your savings. It's crucial to understand the costs involved and to weigh them against the potential benefits before making a decision.

Every individual's financial situation is unique, and it's important to take into account factors such as your retirement goals, current financial situation, and investment portfolio when making a decision. You should seek advice from a financial advisor who can help you to determine the best course of action for your specific situation, taking into account the costs and benefits of each option.