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The Top 5 Reasons to Roll Over Your 401(k) to an IRA

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December 05, 2021

The Top 5 Reasons to Roll Over Your 401(k) to an IRA

Whenever you get a new job, you need to make a decision regarding what you're going to do with the 401(k) from your former job. This can certainly feel like an intimidating task for most people. First and foremost, you're already feeling the stress of getting used to your new surroundings including your co-workers, and boss. Now you're adding a long-term financial decision into the mix. You may find that your new employers 401(k) plan is less than desirable. So, what can do you with your money?

There are several choices for what to do with your old 401(k) when you retire or change jobs. If allowed, roll over to new employer 401k plan or leave in the existing plan, cash out, or rollover to an Individual Retirement Account, or IRA for short. There are many advantages to keeping your retirement money in an IRA, if that option is available to you. You may be tempted to cash out your old 401(k) account but cashing out your old 401(k) account will cost you quite a bit in taxes and penalties if you're younger than 59.5 years old. Although it's simple to request a 401(k) withdrawal, the Internal Revenue Service will absolutely take a significant portion out of the money that you will receive.

Chances are also incredibly high that you'll also pay income tax on the withdrawal amount in the year that the withdrawal occurs. If that's not enough of a hit, you're also looking at paying a 10% penalty on top of that. On the positive side of the ledger, rolling over your old 401(k) into an IRA provides you with the ability to continue saving money towards your retirement in the same tax effective manner that the 401(k) provides you with. Another reason to roll over your 401(k) to an IRA is due to the fact that transferring your old 401(k) funds into a new 401(k) accounts is not always possible.

For example, the new company that you work for may not offer a 401(k) option, or have restrictions about rolling over your 401(k) accounts from previous employers. In addition, you may not be eligible for a 401(k) with your new employer until you've worked at the organization for a specified period of time such as 6 months or even a year. Furthermore, your old employer may very well require that you roll over your old 401(k) account within a short period of time of you leaving your former job.

On the other hand, IRA accounts are not tied into your employer and their rules and regulations. That means you can roll your old 401(k) into a new IRA account at any time in order to continue growing your retirement account in an incredibly tax-effective manner. The bottom line is that an IRA account provides you with the ability to gain significantly more control of your retirement money investment. The third reason to roll over your old 401(k) accounts into an IRA is because you can ensure that you're not paying too much in account related fees.

As you know, high fees and unnecessary fees significantly reduce your savings. That means it becomes even more difficult to retire comfortably. Although a few 401(k) companies charge reasonable fees, most of them are on the opposite end of the scale. In essence, they not only charge exorbitantly high fees, they also tend to hide those fees. On the other hand, the vast majority of IRA companies make it easy to figure out the fees that you will be paying prior to opening the account.

The fourth reason to roll over your old 401(k) account to an IRA is due to the fact that you are allowed to choose an IRA company that works for you instead of your employer. With a 401(k) account, your employer is in charge of choosing the financial institution. They are choosing based on their specific needs instead of the needs of their employees. This may very well work against you. However, when you have your hard earned retirement money in an IRA account, you get to choose who manages it.

Last but certainly not least, the fifth reason to roll your old 401(k) into an IRA account is because an IRA will provide you with far more investment options. For example, the investment options with a 401(k) account are typically limited to the options that your employer has elected. However, with an IRA account you have a wide range of investment related options. For example, you can choose from ETFs, stocks, bonds, and other investment instruments. You can even have your money managed for you when it's in an IRA account through the use of an automated IRA.

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About the author

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Mark Scribner

Managing Director, Boston

Mark F. Scribner is the Managing Director of oXYGen Financial, Boston Office. Mark grew up in Melrose, MA and now lives in Boston. He has an amazing wife Michelle, who supports all of his crazy endurance endeavors, including a solo attempt to swim the English Channel! Mark is the father of four children - Mark, Bella, Olivia and Emma. He loves being an assistant NFL photographer and cancer fundraiser, along with creating and running various companies.


The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.
Background and qualification information is available at FINRA's BrokerCheck website.

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