Should You Rollover Your 401(k)?

For many people, 401ks consist of the majority of their retirement savings. In fact, according to the Investment Company Institute, Americans have over $4.5 trillion invested in 401k savings. While you are working, this has become the preferred method, for employers and employees alike, to save for retirement.

There are two questions many people ask. First, when I leave the company, is it safe to keep the 401k with the old company or should it be rolled out into a traditional IRA? Second, while I’m still working, if I am eligible, should I do an “in-service” distribution and roll the money to a traditional IRA? Before you make this decision, there are a few main points to consider.

401k plans offer one benefit most other retirement plans do not offer. If you separate from service after age 55, you may take distributions from your 401k free of any IRS penalties. Most other plans, including traditional IRAs, require you to wait until you are 59 ½ to take distributions without an IRS penalty. So, if you plan to retire early and take distributions before age 59 ½, it may be in your best interest to leave at least a portion of your savings in the 401k.

Also, 401k plans may have lower fees than outside investments. This topic may be highly debatable, because 401k plans have been notorious for their lack of transparency of fees. Even after a congressional ruling requiring more transparency, many still wonder to what extent the 401k plans are complying. Even still, you may be able to find lower cost options of investing within your 401k.

Having lower fees also has a downside – many 401k plans offer very little investment advice. You may be forced to do your own investment research and hope for the best. Also, you may be limited on your investment options. I‘ve seen 401k plans with just a handful of mutual funds to choose. If you roll your money out of the 401k, you can invest your money in almost any type of investment.

And finally, most 401k plans do not have a systematic withdrawal plan. If you would like to receive a monthly check from your investments to support your retirement lifestyle, this most likely cannot be done through your 401k. In this case, it would be better to roll the money into some sort of income generating IRA plan.

So, if you have a 401k plan and are wondering what to do with it, these few ideas may give you better insight whether to leave it or roll it.