Should I Roll Over My 401k?

Financial Professional

Deciding what to do with a 401(k) from a previous employer is a common financial dilemma. One of the options available to you is a rollover into an individual retirement account (IRA) or a new employer's plan. The decision is significant and can potentially impact your long-term financial health. Understanding what a 401(k) rollover entails, the pros and cons, as well as the alternatives, can help you make the best choice for your retirement funds.

Understanding 401(k) Rollover

A 401(k) rollover is a process where you transfer the funds from your old 401(k) account to another tax-advantaged retirement account, such as an IRA or a new employer's 401(k) plan. The process helps to maintain the tax-deferred status of your retirement assets. It's essential to understand the difference between a 401(k) rollover and a transfer. A rollover can occur from a 401(k) to an IRA or another 401(k), while a transfer usually happens between similar account types, such as IRA to IRA.

Two types of 401(k) rollovers exist: direct and indirect. In a direct rollover, your 401(k) funds are sent directly from your old employer to your new plan or IRA, with no tax implications. An indirect rollover involves the funds being paid to you, after which you have 60 days to deposit them into another qualified retirement account. If you miss this window, you'll face taxes and penalties.

Key Factors to Consider Before a 401(k) Rollover

Investment Options

Different retirement plans offer a variety of investment options. Some 401(k) plans might have limited investment choices compared to the vast array of options available in an IRA. Rollover to an IRA may provide a broader range of potential investment opportunities.

Fees and Expenses

The fees and expenses associated with your retirement account can significantly impact your returns over time. Some 401(k) plans, especially those sponsored by large employers, have lower costs than IRAs. However, IRAs at discount brokerages can be very cost-effective, especially if you're a self-directed investor. Understanding the cost structure of both options can help you make an informed decision.

Account Management

Managing multiple retirement accounts can be challenging and time-consuming. If you've changed jobs multiple times over your career and have left your 401(k) at each previous employer, consolidating these into a single IRA can simplify management and provide a clearer picture of your overall retirement assets.

The Advantages of a 401(k) Rollover

Access to Better Investment Choices

With a rollover IRA, you can potentially access a larger universe of investment choices compared to a 401(k). This could include individual stocks, bonds, ETFs, and mutual funds across various sectors, enabling a diversified portfolio that aligns with your investment strategy and risk tolerance.

Potential for Lower Fees

Some 401(k) plans, particularly those from small employers, can have high fees that eat into your retirement savings. By rolling over these funds to an IRA at a low-cost brokerage, you might save on fees, leaving more of your money to grow through compounding.

Flexibility and Control

An IRA often provides greater flexibility and control over your investments than a 401(k). You can pick the specific investments in your IRA, while with a 401(k), you're typically limited to a menu of pre-selected funds.

The Disadvantages of a 401(k) Rollover

Potential for Penalties

Improper rollovers can lead to penalties and tax consequences. For instance, if you opt for an indirect rollover and fail to deposit the funds into a new retirement account within 60 days, the amount becomes subject to income tax and potentially a 10% early withdrawal penalty if you're under age 59½.

Loss of Loan Privileges

Some 401(k) plans allow participants to take loans against their account balance. This option is not available with IRAs. If you think you might need to borrow from your 401(k) in the future, you might want to leave your funds in your current 401(k) or roll them into a new employer's plan that also allows loans.

Differences in Legal and Creditor Protections

401(k) plans often have strong legal protections, including from creditors in the event of bankruptcy. In contrast, IRAs have a different level of bankruptcy protection that varies by state. If protecting your assets from creditors is a concern, this is a factor to consider.

Alternatives to a 401(k) Rollover

Leaving Your Money in the Old 401(k)

If your old 401(k) has low fees and good investment options, you might decide to leave your money where it is. Be sure to consider how this decision would fit into your overall retirement plan and asset management strategy.

Cashing Out Your 401(k)

Cashing out should generally be a last resort due to the potential for taxes and penalties, not to mention the damage to your long-term retirement savings. However, in extreme financial emergencies, this could be an option.

Transferring to a New Employer's Plan

If your new employer's plan allows it, this could be a good option that allows for consolidation of your retirement assets, continued loan privileges, and potentially strong creditor protections.

Process of a 401(k) Rollover

Initiating the Rollover

The process begins by contacting the administrator of your old 401(k) plan and telling them you want to initiate a rollover. They'll guide you through the specific steps for their process.

Choosing the Right IRA

You'll need to open an IRA if you don't already have one. Consider the investment options, fees, and services of various brokerage firms before deciding where to open your account.

Completing the Rollover

After the funds are in your IRA, you'll need to choose your investments. Consider your time horizon, risk tolerance, and retirement goals when selecting your investments.


Deciding whether to roll over a 401(k) is a personal decision based on your individual circumstances. It's crucial to understand the advantages, disadvantages, and potential alternatives. Given the complexities involved, consulting with a financial advisor may be beneficial to make a decision that aligns with your long-term financial goals.

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