Should you give up 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 experienced the need to rollover an old 401(k). Before you take this step, there are a few things you should know. First, your options are to roll over to an IRA, roll over to a new 401(k), or cash out.

(Cashing out is generally not a good idea, since you’ll pay taxes and penalties—and wipe out your retirement savings!)

But there are a few more factors to consider. I myself just took the plunge and rolled out an old 401(k) into my IRA, and it made me realize that there are quite a few mistakes to avoid in this process. There are a few factors to think about before you transfer money.

Pay attention to commissions

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

In general, 401(k) fees typically range from 0.20% to 5%, while IRA fees are typically lower. (In many cases, $0!) But even a 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 return. By the time they turn 65, here’s what their account balance will look like with fees of 0.25%, 0.50% and 1.00%:

Data source: author’s calculations.

Just a half-percent difference in fees could cost you $554,828 compared to your retirement savings.

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

Avoid a taxable event

One of the biggest concerns I had with rolling over my 401(k) was whether it would trigger 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’ll have to pay taxes on the growth.

The good news is that as long as you roll over your old 401(k) directly into an IRA or new 401(k), you don’t create a tax liability. Just be sure to do a direct transfer, which transfers funds directly from one account to another.

If the check is made out to your name and you then contribute it to your 401(k) or IRA, it may trigger a mandatory tax withholding. A direct rollover (where one retirement account provider directly sends funds to another retirement account provider) avoids this problem.

Another important factor 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 retirement decisions. If this is important to you, make sure the plan you’re switching to offers the same or more robust tools.

Consider 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 broader range. And if your new 401(k) doesn’t offer the investments you want, switching to an IRA may give you more freedom. IRAs typically offer a wider variety of investment options, including access to individual stocks, high-interest CDs, bonds and ETFs.

Time your turn correctly

If you’ve just started a new job, it may make sense to wait until you’re more comfortable before rolling over your 401(k). If you’re waiting for an employer match or a bonus, it’s best to wait until those funds are distributed before rolling over the account.

Avoid rolling over funds when the market is particularly volatile. If the market rebounds strongly while your funds are in transit, you could miss out on potential profits. On the other hand, moving a position when the market is down can be a good move because you will be able to buy more shares for less money.

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