Making a career change is an exciting time, but don’t forget about the money sitting in a 401(k) plan that you’ll likely need to move when you leave.
When deciding what to do with your existing 401(k), there are few different options, including cashing out and paying early withdrawal fees, or rolling it into a new 401(k) or an Individual Retirement Account (IRA). IRAs provide many advantages, making it an easy and stress-free transfer. IRA options include:
- Traditional IRA: Contributions are made with pre-tax dollars and participants pay capital gains tax upon withdrawal.
- Roth IRA: Contributions are made with after-tax dollars, meaning that the funds grow tax-free through retirement.
If you’re not sure which IRA to choose, read Slavic401k’s blog that compares the two account types. Regardless of the account you choose, an IRA is a great step to take for retirement, so keep reading to learn about the three top reasons you should roll your old 401(k) plan into an IRA.
#1. Contributions and Tax Deductions
Many employer-sponsored 401(k) plans have pre-selected investment options, such as mutual funds. When transferring your retirement funds to an IRA, you will often have more investment options to choose from, such as stocks, bonds, EFTs, and more.
While the IRS sets annual contribution limits for IRAs, you can easily transfer funds from a 401(k) and invest the dollars in a variety of ways to help your account grow tax-free. This means that once the money is in the IRA, there are no taxes required for capital gains and dividends until distribution, depending which IRA you have. Traditional IRAs account owners will owe taxes on withdrawals made once they start taking distributions, whereas Roth IRA account owners will not.
Speak with a financial advisor if you need help selecting the right IRA for you and your family.
#2. Consolidating Accounts
As you change careers throughout your life, you’ll likely acquire many employer-sponsored 401(k) plans. Kiplinger, along with many financial experts, advise consolidating accounts into an IRA as a way to reduce investment risk and enhance tolerance.
As you get closer to retirement age, it’s important to change your investment strategy, which is why consolidation is so important. Not only is it easier to keep track of your funds, but you can appropriately assign funds to different investment options, some of which may be more conservative or riskier than others. This allows you to protect your retirement nest egg while also testing more volatile markets if you choose to.
#3. Reduced Fees and Costs
Many 401(k) plans are subjected to a variety of fees, including administrative costs, asset class fees, and management charges, all of which reduce investment returns over time, according to Investopedia.
While an IRA isn’t 100% fee-free, the account is easier to manage and can be done easily by the account owner, which can reduce the amount of fees you’re paying over time. The more you can manage on your own, the more money you’ll have available to invest in investments of your choosing.
Changing careers is exciting, and while you’re busy diving into new hire paperwork, don’t forget to rollover your 401(k) into an IRA plan that works with your retirement goals, Learn more about rolling a 401(k) into an IRA here.
To learn more about retirement savings and tips, visit the Slavic401k blog.