Take your money with you
I have a nice fat 401(k) and plan to leave my job soon. Should I roll it over into an IRA or leave it where it is?
NEW YORK (CNNMoney.com) - I'm 28 years old and have about $55,000 in my 401(k). I plan to leave my job within a year or so, work for a small firm for a couple of years and then become self-employed. My question: should I leave my 401(k) with my present employer (I like the plan), move it to my new employer or just roll it into an IRA?
-- Michael, San Francisco, Calif.
I think the answer largely depends on how the investment options, expenses and other features in the 401(k) plans at your present and future employers compare with what you can get at an IRA at a brokerage firm or mutual fund.
As a matter of convenience, it probably makes sense to roll your present 401(k) into your new employer's plan when you switch jobs, provided your new company allows such transfers (which most do). By doing this, you'll have all your 401(k) money -- new and old -- in one place, which will make it easier for you to create a well-balanced portfolio and monitor its progress.
But if your new plan's investment menu is limited or the fees are high -- or your old plan has options your new one doesn't, such as free investment advice or knock-your-socks off tools for retirement planning -- then you might want to just keep your money at your old company even if it does mean keeping track of two 401(k)s.
The IRA option
One advantage rolling your money into an IRA has is a variety of choices. These days, most banks, mutual fund companies and brokerage firms have IRA rollover accounts that give you access to more fund choices than most 401(k)s make available. You can even set up a self-directed brokerage account if you like, and buy individual stocks.
That smorgasbord of choices can be a good thing, or bad. If you see a huge lineup of funds and stocks as a way to jump around from one investment to another trying to capitalize on the latest hot trend, you could end up squandering a good chunk of your retirement savings on losses from a combination of transaction fees and poorly timed investments.
If, on the other hand, you use this greater latitude to your favor -- say, by investing in a lineup of index funds or other low-cost options -- you could very well end up growing your nest egg faster than you would by keeping your money in a sub-par or so-so 401(k) plan.
Since you say you plan to be an entrepreneur, there's one more factor you might want to consider. If you transfer your money to an IRA rollover or leave it with your previous employer, you can't borrow against those accounts. By moving your stash to your new employer's 401(k), however, you can take out a 401(k) loan (again, assuming your new employer's plan allows borrowing, which is usually the case).
While I certainly don't recommend borrowing willy nilly from your 401(k), the loan option could very well come in handy in helping you get your new venture off the ground while you're still employed.
Think about your allocation strategy, too
One option you didn't raise -- perhaps because you rightly rejected it out of hand -- would be to simply cash out your 401(k). But taking the money and running with it would be a huge mistake. Not only would you be giving back a big portion of the payout in taxes and penalties, you would be short-changing your retirement by foregoing the appreciation you would earn on by rolling over your account.
I've laid out the basics here, but there are plenty of other issues to consider, such as how to invest your money wherever you end up putting it. For advice on that issue as well as guidance on other rollover issues, I suggest you take a look at my colleague Penelope Wang's cover story in the April issue of MONEY Magazine, "The money move you must get right."
You're off to a great start with fifty-five grand in retirement savings under your belt at the tender age of 28. And if you think this through along the lines I've suggested, you should be able to keep that momentum going and find yourself sitting on a nice fat seven-figure nest egg come retirement time.
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