Should You Roll Over Your Old 401(k)? Here’s What to Consider

Whether you’ve changed jobs or simply want more control over your investments, most of us have been faced with rolling over an old 401(k). There are a few things you need to know before you take action. First, you have options: Roll over to an IRA, roll over to a new 401(k), or cash out.

(Cashing out is usually not a good idea, as you’ll pay taxes and penalties and reduce your retirement savings!)

But there are a few more factors to consider. So I took the plunge and rolled an old 401(k) into my IRA, and it made me realize there are a lot of pitfalls to avoid in the process. There are a few factors to consider before moving your money.

Beware of fees

These small fees for management, investment, consulting and other expenses can add up faster than you expect. Compare the fees between the two accounts to make sure rolling over your investments won’t cost you more.

In general, 401(k) fees tend to range between 0.20% and 5%, while IRA fees tend to be lower. ($0 in most cases!) But even a very small percentage difference can have a significant impact on your long-term savings.

Let’s look at the difference fees can make for a 25-year-old with an average annual contribution of $20,000 and a 7% annual rate of return. Once they reach age 65, their account balances will look like this with fees of 0.25%, 0.50% and 1.00%:

Data source: Author’s calculations.

Just a half percent difference in wages could cost you $554,828 over the course of your retirement savings.

Looking for a low-fee IRA to rollover your old 401(k) to? Click here for a list of the best IRA brokers.

Avoid a taxable event

One of the biggest concerns I had when rolling over my 401(k) was whether it would create a taxable event. A taxable event is any financial transaction, such as the sale of an asset or withdrawal of funds, that triggers a tax liability, meaning you will have to pay tax on the growth.

The good news is that as long as you roll over the old 401(k) directly to an IRA or new 401(k), you won’t create a tax liability. Make sure you do a direct transfer, where funds are transferred directly from one account to another.

If the check is made out to you and you deposit it into your 401(k) or IRA, this could trigger a mandatory hold on taxes. Direct rollover (where one retirement account provider sends funds directly to another retirement account provider) eliminates this hassle.

Another important consideration is the tools and resources your current employer (or IRA) offers compared to your old plan. Tools like retirement calculators, market research, and educational content can help you make smarter decisions about your retirement. If these are important to you, make sure the plan you transfer to offers the same or more powerful tools.

Consider your investment options

Pay attention to the types of stocks and investment options each plan offers. Some 401(k) plans have limited options, while others may give you access to a wider variety. And if your new 401(k) doesn’t offer the investments you want, switching to an IRA may give you more freedom. IRAs generally offer a broader range of investment options, including access to individual stocks, high-interest CDs, bonds and ETFs.

Time your rollover right

If you’ve just started a new job, it may make sense to wait until you’re established before rolling over your 401(k). If you’re waiting for an employer match or bonus to occur, it’s better to wait for those funds to disperse before transferring the account.

Avoid transferring your funds during times when the market is particularly volatile. If the market makes a big rally while your funds are in transition, you could miss out on potential gains. On the other hand, when the market is down, rolling over the stock can be a good move because you will be able to buy more shares at a cheaper price.

By paying attention to fees, avoiding taxable events, and considering your investment options, you can ensure your retirement funds continue to grow. Take time to compare your choices and plan your delegation carefully; Your retirement savings will thank you for it.