When you leave a job or retire, you have to decide what to do with the money you’ve saved in your 401(k). You usually have three options:

  1. Leave it where it is.
  2. Roll it to a 401(k) at your new firm.
  3. Roll it into an IRA, a process called an IRA rollover.

For most people, it makes sense to do a rollover of your 401(k) plan into an IRA, so that you can save money on fees and get access to a greater variety of investments.

The Difference Between 401(k)s and IRAs

First, it’s important to understand the difference between a 401(k) and an IRA. With a 401(k), your company’s administrator runs the plan, choosing which mutual funds and other investments are available and setting rules about withdrawals. If you have an IRA, you are in charge. You can hold your IRA at a bank; a brokerage, like Merrill Lynch or Fidelity; or an online advisor, like Betterment.

The big advantage of a 401(k) is the company match—if you have one—and the automatic deductions made from your paycheck. If you’re no longer employed with a company, those advantages disappear. So your decision should come down to which kind of plan helps you keep and grow your investments over time, how high the fees are and how easy it is manage your money.

401(k) IRA
Plan Run By Employer Individual
Employer Match Often None
Investment Options 28 (on average)1 5,000+
Fees Variable, but set by administrator Variable, but  investor has choices
Tax treatment Upfront tax break Upfront tax break (Traditional IRA)

1The BrightScope/ICI Defined Contribution Plan Profile: December 2016

What Is a 401(k)-to-IRA Rollover?

An IRA rollover is when you move money from a 401(k) (or similar plan) to an IRA. When you do a direct rollover to a Traditional IRA, no taxes need to be paid. Your assets and money just move from one type of account to another and you keep all of your tax benefits.

Should You Roll Over?

There are three things to consider when you are deciding whether to do a rollover:

  1. Fees
  2. The range and quality of investments in your 401(k) compared with an IRA
  3. The rules of the 401(k) plans at your old or new job

It’s important to make a deliberate decision about a rollover. Don’t let inertia make the decision for you. Leaving your money in your old 401(k) could cost you tens of thousands of retirement dollars, or even more. On the other hand, if you have an unusually high quality 401(k) plan, it can be smart to keep your money where it is.

Fees: IRA vs. 401(k)

IRA accounts from many big brokerages usually have no annual fees. However, most 401(k)s charge a percentage of assets, some as high as 2 percent a year. You can find out more about how much your 401(k) charges by asking your plan administrator or checking how it rates on Brightscope.com.

The mutual funds inside your 401(k) or your IRA come with their own price tags, too. Ask your 401(k) plan administrator to break out the fees for you and compare them to what you would pay on the funds you buy in your IRA. Large companies sometimes get better deals on certain fund charges that you can get as an individual investor, but it is highly dependent on your provider.

If you want more active counseling on your investments, your options will change. Some 401(k) plans include advisory services. Many brokerages have advisors that you can call, but if you want more complete financial advice, you may need to hire a financial planner. Brokers and advisors usually charge an advisory fee, which could be as much as 1 percent of your assets, if it’s not a flat fee.

The Quality of Investments

Unless you work for a company with a very high-quality 401(k) plan—usually these are the big, Fortune 500– type firms—you will probably find there are more kinds of investments available to you through an IRA.

You can often buy an annuity through an IRA, for example. Annuities can give you an income stream during retirement in exchange for a lump sum paid up front, though you need to be careful to consider fees and the impact of inflation on your annuitized payments.

The Rules of the 401(k)

Most 401(k) plans go by these rules:

  • If you have less than $1,000 in your 401(k), an employer is allowed to cash it out and give it to you. It will be subject to taxes.
  • If you have between $1,000 and $5,000 in a 401(k), your employer is allowed to automatically put it in an IRA.
  • If you have more than $5,000 in a 401(k), you must decide whether to leave it in the 401(k), do a rollover to your next employer’s plan or do a rollover to an IRA.

Other rules may be more specific to your plan. For instance, some 401(k)s set limits on how easily you can withdraw money and how large a sum you can withdraw at once. Ask your 401(k) plan administrator for your plan’s rules. If you are changing jobs, ask at both the new company and the old company before you decide what to do.

Two Advantages of an IRA

If you chose the IRA rollover route, you can keep making contributions to your IRA, receiving a tax deduction up to $6,000 ($7,000 if you are 50 or older), in years when you are self-employed. (Remember, these contribution limits may change over time.)

If you need your retirement money in an emergency before you are 59½, it is also usually easier and faster to withdraw it from an IRA than a 401(k).

Two Advantages of a 401(k)

Some plans allow you to borrow against the money in your plan. In an emergency, this could be a good alternative to taking a taxable distribution.

Some 401(k)s also have higher protections against creditors if you declare bankruptcy.

Check with your plan administrator for the rules and your state’s laws.

Setting a Rollover Strategy in Your Working Years

If you are younger, you should consider setting a rollover strategy. Americans change jobs about 11 times over their careers. If you’re smart, you started a 401(k) at every job, especially if your employer matched your contributions. Starting in 2019, you can put up to $19,000 into your 401(k)—$25,000 if you’re 50 or older—in addition to any match.

If you change jobs a few times, consolidating your savings by rolling them into a single IRA will make it much easier for you to manage.

If You Are Retiring: One Rule of Thumb

One good rule of thumb that can help simplify the decision about whether to do an IRA rollover when you are retiring: The larger your company and 401(k) plan, the cheaper and better it probably is. If you work for a large company, you can see where your plan ranks at Brightscope.com.

If you are retiring now from a company with a superior plan and have just one large 401(k), give serious consideration to leaving the money where it is.

Best Places to Roll Over a 401(k)

Let’s say you’ve decided to move your money from an employer-sponsored 401(k) plan to an IRA that you control yourself. The mechanics of the rollover are easy: Your plan administrator will have paperwork for you to fill out. Once you have opened your IRA, he or she will handle the transfer. Let’s look more specifically at the bigger decisions to make and the points to consider.

Low-Cost Rollover Options

Your first decision is where to put the IRA: with a bank, brokerage or online financial advisor. One factor to bear in mind is the administrative and management fees each institution charges. Amounting to as much as one percent to two percent of your portfolio, these investment costs can eat away at your savings (it’s like the magic of compound interest, only working against you instead of for you). Even worse, with most management fees, you never see them: They just get deducted from your account. Fees tend to be lower with online plan administrators because they have less overhead, but brick-and-mortar companies do offer face-to-face interaction (see more on customer service, below).

The particular funds you invest in carry fees and charges, too. But the good news here is that there are plenty of low-cost options among fund providers, and the costs keep coming down every year. Big mutual funds and ETFs (exchange-traded funds) can now have annual costs of 0.15 percent or even lower. Fidelity, for example, offers 17 funds that have an expense ratio of 0.10 percent or less. These differences may sound small, but they really add up over time.

IRA Investment Options

The next important consideration is finding somewhere with good investment options that work for you. This is rarely about the number of choices. Most brokerages offer a wide range of options. E*TRADE, for instance, has more than 9,000 mutual funds, not to mention every stock and option that trades on the major exchanges.

The real question becomes how you narrow down these options and find the right fit for your needs. For many people, lifecycle funds (also called target-date funds) are a great choice. You chose a fund based on the year when you want to retire and the fund does the rest. It automatically chooses investments for you, rebalancing over time as you get closer to retirement.

A target-date fund may invest you more heavily in equities, for example, when you are 20 years from retirement, since they offer better returns on average. Once you get closer, say within five years, the fund will shift to lower-risk investments, such as bonds, to preserve your return and start providing income.

While lifecycle funds have a professional fund manager deciding when to rebalance, a new class of “robo-advisors” rely on sophisticated computer algorithms to manage your portfolio. The best known of these, Betterment, will ask a few questions about your particular situation, then build a custom portfolio it thinks will perform best for you.

Rollover Customer Service

The actual process of doing an IRA rollover isn’t all that cumbersome, but it can still be a bit confusing at times. And there can be complications or confusion along the way.

In these situations, you want to make sure that there is someone to help you with your rollover who is watching out for your best interests. First, if you are dealing with a financial planner or advisor, make sure that they are acting in a “fiduciary” role. This means that they are putting your financial interests first and must help you find the best investments possible. New regulations from the Department of Labor mandate that all advisors dealing with retirement accounts be fiduciaries, but it’s still best to check.

Many of the big brokerages also have special rollover help desks that can guide you through the process and assist you when you get stuck. Some even perform a complimentary, one-on-one portfolio review. Most financial firms really want your IRA business, so make them earn it.

The Bottom Line

A 401(k)-to-IRA rollover occurs when you move the money from a 401(k) run by your employer to an IRA at a bank or brokerage that you control yourself. Most rollovers happen when people retire or change jobs.

A rollover usually doesn’t trigger taxes or raise tax complications, as long as you stay within category. That means you move a regular 401(k) into a Traditional IRA, and a Roth 401(k) into a Roth IRA.

You should consider a rollover if it makes it easier for you to manage your money, helps you save on fees or get access to better, lower-cost investment options. If you decide you want to do an IRA rollover, your next decision is where to open the account, and how to get the most bang for your IRA bucks.

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