A Simple Guide to the 401(k) Rollover

401(k) Rollovers--this topic can tend to overwhelm, but it doesn't need to. When you leave a job, you have just 4 options with your 401(k). This beginner's guide will cover each option and break down the pros and cons of each.

Option 1: Do Nothing

What this means? The name here is pretty self explanatory. But, because this is technically an option, I have to list it. I suspect, however, that if you're taking the time to read this guide, you're probably leaning towards action (which I fully support).

Pros:

• Saves you time and energy today

Cons:

• You remain limited to the investing options in your prior employer's plan
• You'll likely collect multiple dormant accounts over the years
• Can be hard to become manage (including remembering usernames and passwords)

Option 2: Move over to new company's 401(k) plan

What this means? Once again, the name here is pretty self explanatory. Some folks gravitate to this option because they're going to open a 401(k) with their new employer anyway, so they figure "Why not just keep it all in the same place?". That certainly can be convenient. However, the average 401(k) plan has only 12 investment options, so the benefit of rolling over to something with better options than your new employer's plan may very well be worth it.

Pros:

• Keeps all 401(k) funds (prior and new employer) in same account

Cons:

• You remain limited to the investing options in your new employer's plan
• Some paperwork involved
• Only available as option if allowable under new employer's plan

Option 3: Move to Individual Retirement Account

Note: There are three sub-types here.

1. Move from Traditional 401(k) to Traditional IRA - no taxes (until retirement)
2. Move from Traditional 401(k) to Roth IRA - taxes (this year)
3. Move from Roth 401(k) to Roth IRA - no taxes (ever)

What this means? To choose the best option for you, you'll need to know what type of 401(k) funds you have: Roth or Traditional. A quick phone call to the broker of your account can help you get clarity here. Note: company match dollars are *always* traditional. So, if you contributed to a Roth 401(k) you'll still have Traditional dollars in your 401(k) (equal to the company match). If you're going to call your broker anyway, you may also ask if they support direct rollovers (this is where they'll transfer funds to your new account for you via wire or paper check). If not, you'll have to go indirect, where they'll mail you a check in your name for you to deposit in the new account within 60 days. A bit more work, but no problem.

Pros:

• You get full control of your investments
• You have many more investment options available to you (thousands more)
• Often lower fees

Cons:

• Some paperwork involved
• May incur taxes (only if rolling Traditional 401(k) to Roth IRA).

Option 4: Cash Out

What this means? In this option, you take all of the money from your 401(k) as cash and keep it for short-term goals. This option can really stifle your savings progress and should only be considered under rare circumstances.

Pros:

• More Cash Today

Cons:

• Stifle retirement savings progress
• Must pay taxes today
• Must pay 10% early withdrawal penalty

Conclusion

Just like most things personal finance, we're not talking rocket science here. The key, though, is to find the right option for you and take action. Most people "choose" option 1 by default for decades and miss out on the higher returns and lower fees option 3 could have afforded them. It takes only a few minutes to rollover your 401(k), but you must act. You've got this!

Happy rolling over, friends.