When you have a 401k plan at work, and you leave your job for any reason, you can choose between taking a 401k rollover into another brokerage account, or leaving your funds with your employer’s plan. For a variety of reasons, it’s nearly always best to roll over your 401k.
Today, it seems that everyone is more nervous about being laid off and having to find a new job. Using a 401k rollover is a good way to at least make sure you have some control over your retirement accounts. Yet the rollover, also called a Rollover IRA or self-directed IRA, is not very well understood.
A 401k roll over is simply an account where you move the 401k funds you accumulated with your previous employer. In the rollover account, you then take over management of the funds instead of leaving them with your employer’s management company. To rollover your 401k account, you simply open a new account with a new broker of your choice. They will give you the paperwork to have everything transferred from your previous job. As long as you aren’t making any withdrawals from your retirement account, there are no penalties or taxes required.
You have four main options when you leave your employer, as to what to do with your 401k account. They are:
1) Take a cash withdrawal, on which you will pay up to 40% in taxes and penalties; 2) Keep your funds with your previous employer’s plan; 3) Move your old 401k balance into your your new employer’s plan, or 4) Move funds into a new 401k Rollover IRA account at a broker of your choice.
Choosing #1 is not a good idea unless you are in serous, dire financial difficulty. Choices #2 and #3 are conservative, hands off type decisions. Only #4 will give you a new chance to really build up your account balances for retirement.
When you keep your funds within an employer’s plan, your investment options are very limited, to a few types of large funds, plus a couple international funds maybe, and one or two money market options. You don’t have a chance to take advantage of market conditions to move your retirement savings into vehicles with the potential for higher returns.
In a self directed Rollover IRA you instead can handle your own account by investing actively. You’ll have full access to tens of thousands of mutual funds, along with stocks, ETFs, bonds and all the types of investment options available to a regular individual brokerage account.
Your opportunity to profit within a self direct IRA is much greater. For example, if your employer’s plan is returning an average of 8%, yet you are able to achieve higher returns with investments of your choosing, say as much as 12%, with a $50,000 account, that means you could retire with an account more than double the balance if you’d have left your account with your employer’s plan.
You can see that the advantages of switching your account to a 401k rollover, instead of leaving it with your employer’s fund managers, can make a big difference in your future retirement stability.
When you switch jobs or retire, a Rollover IRA gives you a choice of investments going forward that are not available in an employer-sponsored plan. A self-directed IRA allows you to structure your retirement portfolio to increase the growth of your retirement savings.
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