When you leave a job or retire, you often have to decide what to do with the money you’ve saved in your 401(k) or Thrift Savings Plan (TSP). You usually have four options:
- Leave it where it is.
- Roll it into a 401(k) at your new firm, if allowed.
- Roll it into an Individual Retirement Account, a process called an IRA rollover.
- Cash out.
For many people, it makes sense to roll over your 401(k) or TSP into an IRA, so that you can save money on fees and get access to a greater variety of investments. Contact a tax advisor to learn if you are eligible to rollover your 401k or TSP to an IRA.
But first, it’s important to understand the difference between a 401(k) and an IRA.
With a 401(k), your company’s administrator runs the plan, choosing which mutual funds and other investments are available, and setting rules about withdrawals.
A rollover into an IRA is when you move money from a 401(k) (or similar plan) to an IRA.
The surest way to get control of your retirement funds without the financial drawbacks is to roll over your 401(k) into an IRA. In a direct IRA rollover, the funds are sent straight from your 401(k) or other qualified employer retirement plan into an IRA without you touching the funds. Your assets and money just move from one type of account to another and you keep all of your tax benefits. If you have an IRA, you are in charge. You can hold your IRA at a credit union or a bank, a brokerage, or an online advisor.
Should You Rollover?
There are three things to consider when you are deciding whether or not to do a rollover:
- The range and quality of investments in your 401(k) compared with an IRA
- The rules of the 401(k) plans at your old or new job
It’s important to make a deliberate decision about a rollover. Don’t let inertia make the decision for you. Leaving your money in your old 401(k) could cost you retirement dollars given the greater investment flexibility IRAs have. On the other hand, if you have an unusually high quality 401(k) plan, it can be smart to keep your money where it is. One thing to keep in mind for IRAs, you can be subject to taxes if you do not make your rollover into an IRA account 60 days from the date you receive a distribution from another retirement plan.
Looking at the big picture
These all may seem like heady decisions, and they are because your future financial health is at stake. A separation from your employer can be a good time to step back and re-evaluate your retirement plan. A good financial adviser can help you sort things out while you decide what to do.
Resources: IRA.com, Bankrate, Forbes, CNBC