After leaving a company, former employees can usually opt to keep their 401K or move the money over into a Rollover IRA. The benefits of rolling over old employer 401ks often outweigh the negatives.
1. Opening up new opportunities
Most 401K or company-sponsored retirement plans offer only a small selection of mutual funds, target-date funds and company stock. With a Rollover IRA, a person can choose to invest in a wide variety of stocks, bonds, exchange-traded funds as well as mutual funds. Diversification is the key to investment success.
2. Avoiding tax complications
By rolling over an old 401K, a former employee does not have to worry about paying taxes or penalties to the IRS associated with early distributions from a retirement account. According to a recent study by Fidelity cited by a Forbes article, one in three people cash out their 401K plan when they leave a company or change jobs. People who take hardship withdrawals owe ordinary income taxes and an additional 10 percent penalty unless they qualify for an exemption.
3. Allowing the money to grow
A person who changes jobs should definitely enroll in a new 401K plan, especially if there is a company match. Just because it’s a good idea to contribute to a new money to a new plan doesn’t mean it’s a good idea to rollover an old 401K plan into a new 401K. In some cases, the plan administrator won’t allow it. A Rollover IRA can continue to grow due to compounded interest as long as the money is invested wisely.
Ultimately, the benefit of an IRA rollover is flexibility. Not only does a person have more investment options, but he or she can eventually choose to convert money from a Rollover IRA into a Roth IRA. Many people view the Roth IRA as the ultimate retirement investment account because the money can be withdrawn tax free in retirement.
By Financial Social Media