Benefits of Converting an Old 401(k) to an IRA

Why You Should Roll Over Your Old 401(k) into an IRA When You Leave Your Job

If you participate in an employer-sponsored retirement plan like a 401(k), what happens if you someday decide to leave the company for a new job or are laid off? Where does that money go?

Your Contributions to a 401(k) Account Are Yours

All the money you contributed to your company’s retirement plan is still yours. If you’re eligible for an employer contribution, you may also have rights to the employer’s contributions depending on your vesting schedule. The company may require up to five years before granting you full ownership of their contributions.

Your Retirement Account Options As an Employee

It can be reassuring to know that you still have access to your contributions and any vested employer contributions. When you finish employment after participating in a workplace retirement plan, you’ll have several options for what to do with the amount due in those accounts. In fact, there are four options you should consider:

1. Withdraw the amount from the plan
2. Leave the money in the plan
3. Roll the amount into your new qualified employer plan
4. Roll the amount into an IRA

What is a Rollover IRA?

A Rollover IRA is exactly the same as a traditional IRA – or a Roth IRA if rolling over Roth 401(k) funds – except that the source of the money is not annual contributions. Instead, the money placed in a Rollover IRA comes from a previous retirement plan, like a 401(k). If you don’t already have an IRA account, you can open one for the purpose of rolling over 401(k) funds without making any additional annual contributions. On the other hand, if you already have an IRA, you’re allowed to roll over 401(k) funds into that existing IRA account.

Benefits of Rollover IRAs

Many people overlook the Rollover IRA option because they prefer to keep retirement funds in some form of employer plans. There are some compelling reasons to choose a Rollover IRA:

1. Continued tax-deferred growth
2. Increased investment options
3. Lower costs
4. Simplified management

Instead of managing several of your previous retirement accounts while changing jobs throughout your career, rolling your plans continuously into one Rollover IRA reduces complexity. You can view one statement and see the balance, recent performance, and investment choices for most of your retirement savings from one account.

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Resources:

• Internal Revenue Service. “Topic No. 413 Rollovers from Retirement Plans.”

Source: https://www.thebalancemoney.com/benefits-of-rolling-your-old-401-k-into-a-rollover-ira-2894485