Should you choose a rollover IRA or hang on to your employer's retirement plan? In this article, we'll walk you through key considerations to help you make a smart choice.
The average worker in the U.S. today will hold 10 different jobs before the age of 40, according to the Bureau of Labor Statistics. And that figure is expected to grow in the years ahead. If you're among the 67% of Americans with access to a defined contribution retirement plan—commonly known by its IRS designation as a 401(k), or in some cases a 403(b) or 457(b)—through your employer, this means you'll likely face this decision several times throughout your life: What should I do with my existing plan?
When you're leaving a job with a retirement plan—or considering what to do with an older account you've held on to—you have 4 options:
- Roll over to your new employer's plan. If you're moving to a new job that offers a retirement plan and allows you to roll in existing assets, it's worth getting the details before you decide—you may find extremely low fees or attractive investment options.
- Roll over to an IRA. This option lets you preserve the tax advantages of your old plan and access a wide range of investment options. Plus, many people find that combining their retirement savings accounts into one place makes it easier to manage their money and track their progress.
- Cash out. There could be significant drawbacks with this option, so before cashing out, ask yourself whether you urgently need the money. You'll likely owe income tax on the money you withdraw and, if you're under 59½, you could be subject to a 10% early withdrawal penalty from the IRS.
Note: The 10% penalty won't apply if you've left your job at age 55 or older (age 50 in some public service jobs). - Leave your plan in place. If you're not ready to make the decision, staying put is an option. You can always choose to roll over into an IRA or another employer plan later. Just be aware of any possible restrictions or downsides to retaining your 401(k) plan. How much access to the plan administrator will you have as a nonemployee? Are there maintenance fees involved? You won't pay taxes on the 401(k) while it remains invested, but as a former employee, you can no longer make contributions to the plan. And if your balance is under $5,000, your employer can distribute it without your consent, so you'll want to have a plan in place.
Choosing a rollover IRA can potentially bring you many benefits: reduced costs, consolidation, a wider range of investment options, and tax advantages. But you should keep some particulars in mind as you weigh the decision.