WASHINGTON (11/6/12)--If you're retiring and haven't made plans for your 401(k), consider rolling it over to a traditional individual retirement account (IRA) (U.S. News Money, Oct. 25).
You could take the money as a cash-out from your 401(k)--research shows that about half of all employees do, although in most cases, this is not the best choice. You'd have to pay normal income taxes, and, if you're younger than age 59 ½, a 10% penalty.
Here are six reasons to roll over your 401(k) to a traditional IRA when you retire:
1. Pay lower administrative costs. Funds in many 401(k) plans have high fees that will cut into your investment returns over the years. Some 401(k) plans even charge an additional maintenance cost once you're no longer an employee. By rolling your money over to an IRA, you can avoid these high costs.
2. Stay on top of changes. Once you're not working, if you don't check your 401(k) plan often, you might not know when the company changes investment choices, trustees, and/or fees. For example, your money could be invested in a fund that's no longer available and be automatically moved into a default account.
3. Retain control. Your old employer's 401(k) plan might have limitations that can result in your money not growing to its full potential. However, if you roll over to a discount brokerage, for example, you could find many more investment choices than in your 401(k) plan.
4. Enjoy better investment options. Many employer-sponsored 401(k) plans have limited investment choices that aren't always the best. You might have hundreds of mutual funds to choose from, for example, but most could have high fees and high expense ratios. It's possible that a large portion of your investments is in company stock. If your employer goes out of business, you could lose your retirement savings. A traditional IRA allows you to invest in a vast array of securities—stocks, bonds, ETFs, and mutual funds—depending on whether you roll over to a discount brokerage or a mutual fund account.
5. Manage fewer accounts. If you've changed jobs a few times over your career, you might have more retirement accounts than you want to handle. Rebalancing alone can become a part-time job! Consolidate and simplify to a single IRA to make it easier to track and manage your investments.
6. Take a penalty-free withdrawal in some circumstances. If your money is in a traditional IRA and you are age 59 ½ or younger, you still can avoid the 10% penalty for withdrawing for certain expenses, such as disability, higher education, first home, medical insurance and more.
When you do the rollover, transfer the funds directly to your IRA to avoid taxes and potentially a 10% penalty. If it's too late and you took the cash out, the IRS will see this as a distribution and keep a 20% withholding tax. You have 60 days from when you received the distribution to roll it over to an IRA and avoid taxes and potential penalties.
Your retirement account could be your largest investment if you've worked for one employer for a long time. A financial adviser you trust can help you understand your investments and the risks associated with them.
For more information, read "Did You Leave a Retirement Plan at a Former Job?" in the Home & Family Finance Resource Center.