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

Whether you’ve switched jobs or just want more control over your investments, most of us have faced rolling over an old 401(k). Before you make the move, there are several things you should know. First, you have options: roll over into an IRA, roll over into a new 401(k), or cash it out.

(Cashing out is generally not a great idea as you’ll pay taxes and penalties — and decimate your retirement savings!)

But there are a few other factors to consider. I just took the plunge myself and rolled an old 401(k) into my IRA, and it made me realize there are quite a few pitfalls to avoid in the process. Before you move your money, here are a few factors to think about.

Pay attention to the fees

Those small fees for administration, investment, consulting, and other expenses can add up faster than you might expect. Compare fees between the two accounts to ensure that rolling your investments over won’t end up costing you more.

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

Data source: Author’s calculations.

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

Looking for a low-fee IRA to roll over your old 401(k)? Click here for our 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, like selling an asset or withdrawing funds, that triggers a tax liability, meaning you’ll have to pay taxes on growth.

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

If the check is made out to you, and then you deposit it into your 401(k) or IRA, it could trigger a mandatory hold for taxes. A direct rollover (where one retirement account provider directly sends the funds to the other retirement account provider) avoids 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 those are important to you, make sure the plan you’re rolling over offers the same or more robust 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 might give you access to a broader variety. And, if your new 401(k) doesn’t offer the investments you want, rolling over to an IRA can give you more freedom. IRAs typically offer a broader range of investment choices, including access to individual stocks, high-interest CDs, bonds, and ETFs.

Time your rollover right

If you’ve just started a new job, it might make sense to wait until you’re settled before rolling over your 401(k). If you’re waiting for an employer match or bonus to hit, it’s better to wait until those funds are dispersed before rolling the account over.

Avoid rolling over your funds when the market is particularly volatile. If the market makes a large rebound while your funds are in transit, you could miss out on potential gains. On the other hand, rolling over when the market is down might be a good move, as you’ll be able to buy more shares for less.

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