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Should I Keep My Money in My 401(k) or Move it to an IRA?

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Have you recently changed jobs and wondered what to do with the money in your 401(k) at your previous employer? You are not alone. It’s important that you know your options and consider the important factors in making the decision.

Options for your 401(k) money

When you leave your job and change employers, you have four options for your 401(k) money at your old employer:

  • Leave money in the current plan (assuming the plan does not have minimum balance requirements)
  • Roll money to the new employer plan (if the new plan allows)
  • Roll money over to an IRA
  • Cash out

Leave money in current plan

If you have more than the minimum amount in your 401(k) (usually more than $5,000), you can often keep your money in your previous employer’s 401(k). You will no longer be able to contribute to the account and you will lose some of the benefits (such as the ability to take a loan), but you will still be able to access your account, make investment changes among the various funds that are offered, and get monthly statements. Some 401(k) plans also provide assistance to help you manage the account at an additional cost. It is important to note that by keeping your money in your old retirement plan, you accept limitations on the number of and types of investments you can utilize and the location of the account. In addition, your past employer has the ability to add or remove investment options and to change the company where your account is held.

Each 401(k) plan has a document called a Summary Plan Description (SPD). The SPD will describe what investment funds are included and what the expense ratios are for those funds. 401(k) plans also offer a fee disclosure document, which explains the costs of the plan to participants. These documents are important to review as part of your decision.

Leaving your money in a 401(k) offers two additional benefits:

  • Federal law protects money in 401(k) accounts from most lawsuits. If lawsuits, judgments, or collections are a concern, you may or may not be protected if you roll your money to an IRA. (IRAs are protected by state law, so you need to know what is protected in your State.)
  • You may be able to withdraw money from your 401(k) at age 55 without a penalty, if you and your plan meet specific requirements. In an IRA, if you withdraw money from your account before age 59½ you may pay a 10% penalty. If you are in the age window of 55 to 59½ and you need to start taking withdrawals, you may be better off keeping your money in a 401(k).

Roll money to new employer plan

Many 401(k) plans allow participants to move their money from a previous employer’s plan into the current employer’s plan. This might be a good option if your new employer plan has better investment options or lower fees and expenses. You will need to perform due diligence on the new plan to ensure you’re aware of the pro’s and con’s.

Roll money over to an IRA

A non-taxable direct rollover of your money to an IRA may provide greater investment options and control over your account. Instead of a limited line-up of mutual funds, you may have access to thousands of investment options, including mutual funds, ETFs (exchange-traded funds), individual stocks and bonds, and alternative investments. Unlike an employer-provided retirement account, an IRA is solely under your control. You choose where to hold it and what to purchase. You also have the ability to hire a financial professional of your choosing, and enjoy the benefits of professional money management. As always, do your homework and understand the relationship, services, and fees associated with any investment program.

Cash out

You have the option to cash out your 401(k) by taking a lump sum distribution. You must pay income taxes on the entire distribution in the year you receive the distribution. In addition, you may pay a 10% penalty for an early distribution depending on your age. Except in exceptional circumstances, such as an unexpected need to cover medical expenses or other hardship need, this option is rarely beneficial to you. Your best bet is to keep your money in either the 401(k) or an IRA to continue growing your retirement savings.



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Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.


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