The Pro’s and Con’s of Rolling Over 401k to IRA

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    32 percent of people between the ages of 25 and 44 have considered a job change in just the last year. In fact, the average person will have a string of 12 job changes over the course of their adult working life. 

    While it’s great to live in a time where you might have job options, it can also complicate your retirement planning.

    Imagine this scenario as you consider the pros and cons of rolling over 401k to IRA.

    Imagine if you sign up for the employee-sponsored 401k (and you should) 12 different times, each with another employer and slightly different inventing options for the plan.

    You could retire with a briefcase of assorted plans, making cohesive retirement planning a challenge. For this reason, many people opt to roll over their 401k plans to an IRA account. 

    Read on to learn more about the pros and cons of executing a 401K plan rollover into an IRA.

    Options You Have for an Old 401K

    Are you wondering why you might choose to roll over your 401k plan? When you leave an employer and go to a new employer, you must decide what will happen to your invested money in the previous employer’s 401k.

    You have four choices. 

    You can opt to cash out the account and take the money. Of course, you’ll pay penalties and fees for taking the money before you’re old enough. 

    Sometimes your new employer will offer a 401k plan. So, you can opt to transfer the money from your old plan into your new plan.

    Be sure to see how long it is before you’re eligible for your new plan. Sometimes employers will have a waiting period before you’re eligible. 

    You can also choose to leave your money in the previous 401k. It’s still your money. But many employers prefer you to take your funds with you. Generally speaking, if the account holds less than a thousand dollars, they may cash it out and take the taxes from the balance. 

    The last option, and usually the best option, is to roll over the old 401k funds into an IRA. 

    What Is a 401k Rollover?

    A 401k rollover is when you take funds from a 401k plan and move those same funds to an IRA plan. 

    Both a 401k and an IRA are tax-deferred investments. Often with a 401k, an employer will also contribute to the plan on your behalf. An IRA isn’t set up with an employer but instead with an independent brokerage firm. 

    When you move the funds from your 401k to an IRA, in most cases, you can continue to defer the tax liability until you reach retirement age. 

    How to Rollover 401k Retirement Funds to an IRA

    If you choose not to leave your 401k funds and instead wish to put them into an IRA, there are some things you need to do. Follow these steps in the process. 

    Choose a New Brokerage Firm

    Remember, while the employer is responsible for the investment of the 401k, they don’t handle IRAs. So, before you can move the money, you need to research brokerage firms and find one that matches your needs. 

    Discuss the Transfer With Both Accounts

    Every firm and account has slightly different procedures. Often to execute a transfer, you must first set up the IRA account. Then the 401k will issue a check that goes to the IRA. 

    Talk to both investment managers to find out the correct procedure for a transfer. 

    Complete Paperwork for Transfer

    You will, of course, need to authorize this kind of transfer which will involve some paperwork. Go to your previous employer for the paperwork to move your funds to the IRA.

    Be Mindful of Time Limits

    Often investment managers will move the money directly from one account to another without you ever actually being directly involved. 

    If they don’t do this and you’re given a check, be mindful of time constraints. In most cases, after two months, you could face tax penalties and fees for not depositing into the IRA quickly enough. 

    Make Investment Choices

    Once your money is in the IRA, you’ll need to decide how it’s invested so the funds can continue to grow. 

    This is an excellent time to talk with a retirement advisor about growing your money.

    Pros and Cons of a 401K Rollover

    Many advantages make moving your money to an IRA worth it. Let’s take a closer look at these pros and cons. 

    Investment Options

    Your 401k probably offered you limited investing options. Typically, a 401k means your money is in some type of mutual fund. 

    An IRA has many more investment options. It allows you more opportunities for growth and more ways to diversify your investments. 

    Account Communication

    Once you leave a company, they will give you only perfunctory communication about your account. You don’t work there anymore, and they are still controlling your funds. 

    An IRA will provide you will more and regular communication about your investment. 

    Lower Fees and Costs

    It’s hard to grow your money if you’re paying a lot in fees and costs for your investments. Saving money should be a priority to grow your account. 

    An IRA typically has lower administrative fees, which can save you a bundle over time.

    Roth IRA Option

    When you roll your funds over, you can move them to a Roth IRA. A traditional IRA and a Roth IRA are different because of when you pay the taxes on the money. 

    More and more 401k plans are Roth 401ks too. This makes moving the money from the 401k to the Roth very simple. 

    You’ll face some tax liability if you go from a traditional 401k to a Roth IRA. There can be some advantages for this later on, though. Talk to your financial planner about which option is best for you.

    401K Rules vs. IRA Rules

    401k plans are set up by employers and therefore have some variable in the rules from one plan to the next. This is not the case with IRAs that must follow the rules established by the IRS.

    One IRA has the same guidelines as another, making it easier for investors to understand and manage them. 

    You Must Manage It

    One potential negative to an IRA is that you have to manage it now. Now, you may have had a 401k plan where you were already deciding where the money was invested. 

    You (and your financial planner) will need to manage and decide how the funds in an IRA are managed. 

    Know the Pros and Cons of Rolling Over 401K to IRA

    Consider these pros and cons of rolling over 401k to an IRA when you leave your job. There are many advantages worth considering with an IRA. 

    If you need help deciding or considering IRA options, we can help. At Bogart Wealth, we can help you make intelligent investment decisions with our independent perspective. Contact us today to get started planning your financial future.  

    Work with a financial advisor who puts your needs first.

    Want to talk first? Call us at
    (866) 237-0121

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