An increasing number of employers offer 401(k) plans for their employees. It's estimated that the average employee will have 10 jobs before they hit 40 years old. This means that there are millions of 401(k) accounts that are essentially orphans. Most companies will allow old employees to leave the money alone, and 22% leave their money with their old employers. However, you might want to roll over your 401(k) to your new employer's plan or an IRA.
Fees and expenses are one of the most important issues you'll want to consider before rolling your 401(k) over. If your new employer has a plan with options that charge lower fees, it's probably a good idea to roll your money into the new plan. Small plans can charge average fees of more than 1.4% on their employees' investments. If you're paying more than 0.50%, it's probably a good idea to begin the rollover process. You can move your money over to your new employer's plan or an IRA. If your new employer has higher fees, you'll want to leave your money alone or roll it over into an IRA.
Another consideration that you'll want to take into account when deciding what to do with your IRA is the number and the quality of the investing options. Some smaller employers will have few options for their employees. Some of these will perform poorly when compared to the S&P 500 or another index. If you're leaving an employer with a roster of proprietary funds, you'll probably want to roll your money over into a new account. Many employers are starting to get the message that their employees want to keep more of their money away from fund managers and financial advisers. Therefore, more are offering more affordable options like index funds.
Deciding upon whether you want to invest your old retirement savings through a new employer's 401(k) or a rollover IRA can sometimes depend upon the level of control you have over your savings. Most employers have a relatively low number of options in their retirement plans. With an IRA, you can have nearly unlimited investing options. If you want to invest in ordinary stock or bond funds, you can do so with an IRA. You can also use an IRA to make investments in other asset classes. You could buy a house to flip with an IRA. You can also hold physical gold or cryptocurrency in an IRA.
More Tax Options
Most people save in a 401(k) plan that allows for tax-deferred savings. Rolling a small 401(k) into a Roth IRA can allow that money to grow tax-free. A Roth IRA also allows for tax-free distributions. If you have a small tax bill in the short run, you could really wind up with a massive amount of tax-free income later in life if you roll your 401(k) into a Roth. Of course, if you have a large amount in your 401(k), you'll probably want to roll a small portion over each year to avoid winding up with a large tax bill.
Many times, leaving your money in a 401(k) can be a good idea, but there are also situations in which you'll want to roll your money over. Your decision will depend upon your particular situation. You'll want to ask questions related to the fees and the choices that are tied to each plan. You'll also want to take your current tax situation into account so that you can make an informed decision that will work best for you in the long run.
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