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.
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.
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.
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 Many people view the Roth IRA as the ultimate retirement investment account because the money can be withdrawn tax free in retirement.