Safest Place to Move 401k Money
Where you move your 401(k) money depends on the type of rollover option you select. In some instances, keeping it within an existing plan could make sense if its fees are low and its investment options match those you prefer.
However, most individuals should consider investing in an IRA. There are various options available, from full-service brokerage firms to robo-advisors.
1. Direct rollover
Direct rollover involves moving money from your previous employer’s retirement account into one that provides lower management fees and investment fees while offering the features you desire.
An indirect rollover may also be advantageous; your company sends you a check made out directly to you and requires you to deposit it within 60 days into either an IRA or new plan of your choosing. Indirect rollovers typically incur 20% federal withholding taxes while any amount not rolled into an IRA or new plan constitutes distributions that could incur taxes or early withdrawal penalties.
Direct transfers to an IRA not only avoid extra costs associated with indirect rollovers, but they also give you access to investments not available through previous employer retirement plans, such as socially responsible or values-based funds that align with your beliefs.
2. Transfer to a new employer’s plan
If the plan of your new employer allows rollovers, it could make sense to transfer funds over to this plan; however, this may not always be the best choice.
Your new employer’s plan may have high fees or limited investment options that do not align with your goals or investment approach – for example, passive funds and socially responsible investing (ESG) might not be included as options in their plan.
Transferring your 401k plan to a new employer’s plan has the drawback of not allowing you to contribute after it has been transferred, forcing you to pay taxes on any money contributed outside. To avoid this burdensome tax obligation, another alternative might be rolling it into an IRA instead, whereby you have more control over how your retirement savings are invested according to your goals, time horizon and risk tolerance – and have access to financial professionals for assistance managing it all.
3. Transfer to an IRA
Your savings in a 401(k) may also be moved directly into an individual retirement account (IRA), which avoids creating tax liability compared to cashing out and depositing them directly into your checking or savings account.
An IRA provides more investment choices than what may be available through your former employer’s plan, with 20-40 mutual funds and several exchange-traded funds typically found within traditional 401(k). An IRA could potentially offer thousands of investment choices.
At the core, choosing the ideal place to move your 401(k) ultimately comes down to personal circumstances and needs. If your current employer offers access to financial planners who can assist with choosing investments, staying where it is may make more sense; but if you feel confident managing your portfolio yourself and prefer an IRA option could be best suited.
4. Transfer to a bank account
As soon as you cash out your 401(k), taxes and an early-withdrawal penalty of 10% may apply; thus, it’s essential that you understand these rules and plan ahead for how best to utilize this fund.
Alternately, you could move your money to a savings account; however, this option usually yields minimal interest and federal insurance is only guaranteed up to $250,000. This leaves your funds vulnerable to inflation.
An annuity provides a secure investment option with guaranteed rates of return that may help to safeguard retirement savings against market volatility.
Target-date funds are an asset allocation method utilized by many 401(k) plans that automatically adjust your investments based on the date you plan to retire, helping reduce risk by moving funds out of more-risky investments as retirement nears. It is essential that you carefully consider all of your options and consult with professionals when making this important decision for yourself.