Save money by rolling over your 401k

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

Thinking about rolling over your 401(k)? It’s a big decision, but one that could save you a significant amount of money over time. Did you know that smaller 401(k) plans often charge around 1% in annual fees? For an account with $200,000, that’s $2,000 a year in fees! How much are you paying?

Rolling over your 401(k) to an IRA or another low-cost option could help you significantly reduce these expenses and allow your savings to grow more efficiently. Some IRAs even offer free plans with no annual fees, making them a very attractive alternative. Whether you’ve switched jobs, are retiring, or simply want more control over your financial future, rolling over your 401(k) might be the smart financial move you’ve been looking for.

Key Takeaways

• Rolling over a 401(k) to an IRA can help cut down on fees, letting your savings grow more efficiently.
• Limited and expensive investment options in your 401(k) can also eat into your potential earnings.
• Avoid costly mistakes by understanding the rules and timelines for rollovers.
• Choosing the right rollover option can align your retirement strategy with your financial goals.

What Is a 401(k) Rollover?

A 401(k) rollover means transferring your retirement savings from your old employer’s plan into another account, like an Individual Retirement Account (IRA) or your new employer’s 401(k). This helps consolidate your funds and may lower the fees you’re paying.

Why Consider a Rollover?

1. Save on Fees

Employer-sponsored 401(k) plans often come with administrative fees that can eat into your savings. Rolling over to an IRA, which typically has lower fees, could save you a lot of money. Some IRAs even have no annual fees, making them a much more cost-effective option.

Hypothetical Example: Sarah had $100,000 in her old 401(k) with a 1% annual fee. She moved it to an IRA charging only 0.25%, saving $750 each year. That’s money she can reinvest and grow over time.

2. More Investment Options

Most 401(k) plans limit your choices to a set number of (often expensive) funds. In contrast, IRAs offer a wider range, including stocks, bonds, ETFs, and even alternative investments like real estate. For example, you could invest in ETFs with minimal fees or explore real estate investment trusts (REITs).

3. Simplify Your Finances

Combining accounts can make it easier to track and manage your retirement savings, reducing the risk of forgetting about old accounts.

4. Keep the Tax Benefits

A rollover allows you to maintain the tax-deferred status of your retirement savings, avoiding penalties or unexpected tax bills—if done correctly.

Rollover Options

1. Rollover to an IRA (Preferred)

An IRA can offer more flexibility and lower fees compared to a 401(k).

Pros:

• Broad investment options.
• Greater control over your money.
• Lower fees (typically, and sometimes no fees at all).

Cons:

• You’re responsible for managing the account unless you hire an advisor.

2. Rollover to a New Employer’s 401(k)

If your new employer’s plan has good features, this can be a convenient option.

Pros:

• Simplifies managing retirement savings in one place.

Cons:

• Limited investment choices.
• Potentially higher fees than an IRA.

3. Cash Out (Not Recommended)

While it’s tempting to cash out your 401(k), this comes with steep consequences:

• Taxes on the full amount.
• A 10% penalty if you’re under 59½.
• Loss of future tax-deferred growth.

Steps to Roll Over Your 401(k)

1. Decide Where to Transfer Your Funds Determine whether an IRA or your new employer’s 401(k) is the best fit for your goals.
2. Set Up Your New Account If moving to an IRA, open the account before initiating the transfer.
3. Inform Your Plan Administrator Contact your old 401(k) provider and request a direct rollover to avoid tax complications.
4. Complete the Rollover Coordinate with both providers to ensure everything is processed smoothly and on time.

Avoiding Common Pitfalls

• Don’t Cash Out: Withdrawing funds leads to taxes and penalties, which can derail your financial goals.
• Follow the Timeline: Rollovers must be completed within 60 days to avoid penalties.
• Compare Fees: Look at the fees for your old 401(k), new 401(k), and/or IRA to make the best choice.

Impact by Life Stage

For Early-Career Professionals:

• A rollover to an IRA offers growth and investment flexibility as you’re likely to change jobs frequently and have a lot of compounding ahead of you.

For Those Nearing Retirement:

• Rolling over to an IRA might simplify withdrawals and offer tailored investment options for income generation.

FAQs

What should I watch out for when rolling over my 401(k)?

Be mindful of fees, potential penalties, and ensure the rollover is done directly to avoid tax complications.

Can I roll over just part of my 401(k)? 

Yes, partial rollovers are allowed, giving you flexibility to leave some funds behind if you prefer (though not recommended as it makes management harder).

Is there a limit on how much I can roll over? 

No, there’s no cap on rollover amounts.