What IRA Should I Roll My 401k Into When I Change Jobs?

As soon as you transition jobs, there are four choices for how your old 401(k) plan should be managed: cash it out and pay taxes and penalties, roll it into an IRA (preferably direct so the check never touches your hands), leave it with your new employer’s plan or convert to a Roth IRA. When selecting which option best suits you, consult with a financial advisor for help making decisions.

1. Traditional IRA

Traditional IRAs can often be the best choice for rolling over your 401k because they provide you with access to an abundance of investment options – including low-cost index funds and ETFs – while being unsponsored by your employer, they allow more flexible investment choices than most company retirement plans.

Your employer and its financial provider typically select investments for your 401(k). That can make it challenging to create an asset allocation that suits your specific needs.

Once you convert your 401(k) plan into an IRA, you have access to an almost-infinite selection of investments ranging from mutual funds and ETFs (Exchange-Traded Funds), individual stocks and certificates of deposit. Fund fees and transaction costs still apply but you should be able to find an online broker or robo-advisor with lower costs than what was used with your previous plan.

2. Roth IRA

Rollover of your 401(k) into a Roth IRA allows for tax-free contributions and earnings to accumulate tax-free for retirement, eliminating RMDs during your golden years. But bear in mind that no investment through brokers comes without some risks attached – though investing through one may reduce fees significantly.

Financial advisors can assist in helping you decide whether a 401(k) rollover to an IRA is best suited to your circumstances and can assess all associated costs, such as investment expenses and management fees.

If you have changed jobs several times during your career–younger baby boomers tend to switch jobs more than twelve times–converting a 401(k) into an IRA is an ideal way to consolidate savings, reduce account management requirements, increase earning potential by lowering costs, provide greater investment choices and simplify retirement planning.

3. Rollover IRA

Changing jobs frequently–baby boomers change jobs an average of twelve times during their careers according to the Bureau of Labor Statistics–rolling 401(k) distributions into an IRA is a great way to simplify investing while cutting fees significantly, which in turn lower returns.

IRAs usually boast lower management and investment fees than 401(k) plans, though this isn’t always true; when comparing options be sure to take all fees into consideration.

The best IRA providers provide low-fee investments such as index funds and no-load mutual funds with no commission fees or other charges, making a differenceful statement when dealing with large balances.

4. Rollover to a new employer’s plan

As soon as you change jobs, your 401(k) options change: keep it with the old employer’s plan, roll it over into your new one or take a taxable withdrawal. Making the right choice could save tens of thousands in taxes but could cost more if made incorrectly.

When rolling over your 401(k), take into consideration all fees–both investment and administrative. See if an online broker or robo-advisor offers lower costs.

When switching employers and transferring your IRA, direct rollover is the preferred approach. Financial institutions send checks directly to new providers with instructions to roll the funds over, which does not trigger 20 percent withholding for taxes and 10 percent penalties for early withdrawals.