When changing jobs, there are several good reasons why you should consider rolling over the old 401k to an IRA. First, is the ability to have better control over your investments. Second is the ability to keep the assets and future earnings tax deferred until withdrawal from the account. Third, you may be able to withdraw funds early without penalty for certain reasons.
Better control over investments
Combining your assets into one investment plan provides a more complete view of your financial situation and makes it easier to implement your overall financial plan and to maintain proper asset allocation. Also, with a rollover you will eliminate restrictions that existed with the old 401k and have more investment options available to you.
There are different types of IRAs to be considered for the rollover. The old 401K can be rolled over into a new employer sponsored plan or it can be rolled over into a personal IRA. With a new employer plan your investment options will be limited by the restrictions of that plan. Rolling over into a personal IRA will give you the most investment options.
It is important to carefully consider the different plan administrators available when making the rollover. Compare the different plans for investment options, track record of earnings, fees they charge and customer service. Pick the plan that you feel is best suited for your particular needs. Do not allow a sales person to talk you into a plan without comparing it to other plans and performing thorough due diligence.
A decision will be needed as to the type of personal IRA to invest in. The choices will be a traditional IRA or a Roth IRA. With the traditional IRA the assets remain tax deferred, but with a Roth IRA the taxes must be paid on the old 401k when the rollover occurs, but all future earnings are tax free forever. Because the original investment amount and any future investment amounts are from after tax dollars and the earnings are tax free no taxes are due when withdrawals are made from the Roth IRA at retirement. Early withdrawals are subject to penalties, however.
Depending on your age when the rollover occurs the Roth IRA may be the most advantageous choice. If you are relatively young with many years until retirement the potential earnings on a Roth IRA and the resulting tax savings may provide you with the most money at retirement.
If you withdraw the funds from the old 401k instead of rolling it over the taxes must be paid plus an early withdrawal penalty. The best way to handle a rollover is to have the administrator of the old 401k send a check directly to the administrator of the new IRA for deposit. If you receive the check the entire amount of the check must be deposited into the new IRA within 60 days or the taxes will be due along with the early withdrawal penalty.
Early withdrawal from an IRA is allowed without penalty for first time home buyers and for qualified education expenses. An IRA rollover can make these types of transactions easier because all of your funds will be in one plan. Also if there are fees involved with the early withdrawal you can avoid paying multiple fees.
Some plans allow loans to be taken out from the funds in the plan. Because these type of loans are limited to a certain percentage of the funds in the IRA account an IRA rollover will make more funds available for this type of loan should you ever need one.
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