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There are pros and cons to each of the 401(k) rollover options.There’s a lot to consider when deciding whether to roll over your 401(k) after a job change. The available options of keeping your account with your former employer or rolling it over into a new tax-deferred plan pose a number of pros and cons, all of which factor into the decision that you will ultimately make. A financial advisor can help guide you through this decision and others like it. Let’s break down the reasons for rolling over and not rolling over your 401(k)

Benefits of Keeping Your 401(k) With a Former Employer

Leaving your 401(k) assets within your former company’s plan is the least labor-intensive solution, it may save you money in fees and keep your money protected from possible legal action.

Convenience: Leaving your money in your previous company’s 401(k) offers convenience to investors who don’t want to bother with contemplating a potential rollover. After all, this is the simplest option — you just leave your account where it is.

Lower fees: The fees and operating costs of your former employer’s plan may be lower than an individual retirement account (IRA) or your new company’s 401(k). If that’s the case, the lower fees may equate to thousands of dollars in additional earnings in the years and decades to come.

Legal protections: Staying in your former employer’s 401(k) will also shield your retirement savings from creditors, lawsuits and potential bankruptcy filings. Federal law protects assets in 401(k) accounts in the event of such legal proceedings.

Drawbacks of Keeping Your 401(k) With a Former Employer

There are potential drawbacks to this strategy, which may lead you to roll over your account into a new plan.

Multiple accounts to manage: Keeping your 401(k) with your former company means you’ll have more than one retirement account to track. For some investors, that may be one too many accounts to juggle.

Contributions end: While the money in your old 401(k) will continue to grow tax-deferred, you will no longer be able to contribute to the account.

Communication: You may be out of the loop about important updates concerning your account if information about your former employer’s plan is distributed via company email.

Higher fees: It’s possible that fees and expenses attached to your former employer’s plan are higher than what is offered by your new company. Remember to check the fee disclosure notice of any plan that you’re in or thinking of joining.

Benefits of a Rollover Into a New 401(k)

When changing jobs you may be faced with the question: "Should I roll over my 401(k)?"

By rolling your old 401(k) into your new company’s plan, you’ll consolidate your retirement savings into one account. That may give you more clarity of your overall financial picture. Here are several other potential benefits of a 401(k) rollover.

Distributions at 55: Under an IRS provision known as the Rule of 55, you can withdraw funds from your current company’s 401(k) penalty-free starting at age 55, instead of 59.5 (provided you leave that job in or after the year you turn 55). By combining 401(k)s, you may have access to your older assets at 55.

Loan options: By rolling over an old 401(k) into a new plan, you may be able to borrow against the account, which is not an option with a 401(k) that remains with a former employer.

Lower fees: As stated above, the fees associated with your new employer’s plan may be lower than those of your former plan or a future IRA.

Drawbacks of Rolling Over Into a New 401(k)

Like keeping your money in your previous employer’s plan, rolling over into a new 401(k) limits your control of your money and poses some other potential drawbacks.

Higher fees: After comparing fees and expenses, you may find that the new plan is more expensive than the previous one. Remember, even a margin of a percentage point can drastically eat into your earnings over a long period of time.

Less diversification: The investments offered in the new plan may be less varied than your old plan or potential IRA investments. And because the account will be managed by someone else, you won’t have much of a say in how your money is invested.

Benefits of a 401(k) to IRA Rollover

If your new employer doesn’t offer a retirement plan or permit 401(k) rollovers, moving your money into an IRA is an alternative to leaving the assets with your former company.

More choices, more control: While your investment options will likely be limited within a 401(k) plan, an IRA will provide you virtually endless possibilities, including stocks, bonds, real estate investment trusts (REITs), mutual funds and more. An IRA gives much more control and freedom to invest your money how you want and when you want.

Lower fees: Because you will have myriad options for your money within an IRA, it’s possible that your investments will have lower fees than a 401(k) plan. By parking your money in passively-managed assets, like index funds and ETFs, you may reduce your expenses.

Drawbacks of a 401(k) to IRA Rollover

IRA rollovers give individuals more control over their money, but they do come with potential tradeoffs.

Less legal protection: Unlike a 401(k), money in an IRA may be vulnerable to creditors and civil lawsuits. While blanket bankruptcy protections that 401(k)s enjoy do extend to money that gets rolled into an IRA, those funds may be exposed in other legal proceedings.

Distribution age: The Rule of 55, which 401(k) investors can tap, does not apply to IRA rollovers. After rolling money over into an IRA, you have to wait to reach age 59.5 to withdraw funds without incurring an extra 10% penalty.

Higher fees: An IRA will give you more investment options than a 401(k), but you may lose out on access to institutional funds — mutual funds that carry the lowest expense ratios and are only available to institutional investors, like 401(k) plans and hedge funds.

No loan option: You’ll also forfeit the option to borrow against your 401(k). That choice does not exist for IRAs.

Bottom Line

A financial advisor can help you answer the question "should I roll over my 401(k)?"

When contemplating a 401(k) rollover, first consider how much control you want over your investments. If you seek full management of your account, rolling the money into an IRA will likely be your best option. For more hands-off investors, leaving the money in your previous plan or rolling it over into your new employer’s 401(k) will allow the money to continue to grow tax-deferred while someone else manages it.

Tips for 401(k) Rollovers

  • Need more help deciding whether to roll over your 401(k)? Consider working with a financial advisor to solidify your retirement plan. SmartAsset’s financial advisor tool can match you with up to three local financial advisors, and you can choose the one who is best for you. If you’re ready, get started now.
  • Compare the fees of various plans by locating their fee disclosure notices. You’ll want to pay attention to asset-based fees (also known investment fees or expense ratio) and administrative fees.
  • Your 401(k) may include shares of company stock. If you want to estimate your tax liability when rolling it over, SmartAsset’s capital gains tax calculator and income tax calculator can help you figure it out.

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Patrick Villanova Patrick Villanova is a writer for SmartAsset, covering a variety of personal finance topics, including retirement and investing. Before joining SmartAsset, Patrick worked as an editor at The Jersey Journal. His work has also appeared on NJ.com and in The Star-Ledger. Patrick is a graduate of the University of New Hampshire, where he studied English and developed his love of writing. In his free time, he enjoys hiking, trying out new recipes in the kitchen and watching his beloved New York sports teams. A New Jersey native, he currently lives in Jersey City.
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