Why You Should Roll Over Your 401K Into An IRA

If you've built up a significant 401K at your current company but you are switching to a different company in the near future, you will have some thinking to do. There are a number of different things that can be done with a 401K once you no longer work at the company that provided it. Let's go over some of the different options and talk about why rolling over your 401K into an individual retirement account (IRA) might be one of the best solutions.

Don't Cash It Out

Your first option for dealing with a 401K when leaving a company is to simply cash it out. While this might be tempting, this is one of the worst decisions you could make if you care about long-term gains. People who cash out their 401Ks early will have to pay significant penalties that can really make a huge dent in the amount of money they have accumulated. Also consider that by essentially giving up on an investment account, you are also throwing away any future compound interest. Don't do this.

Leave the 401K Alone or See If You Can Transfer It to Your New Company's Program

A better solution compared o cashing it out would be to just leave it alone. Your old company's financial services provider will still keep the account open for you going forward, and you can continue earning money if the funds you are invested in go up in price. But you can't add any more money under this method, and you obviously won't be getting a percentage match from your old employer anymore.

Your third option would be to see if your current company's plan will let you transfer in your old fund. While this does have its perks like allowing you to move the money without paying significant penalties, you should also realize that many 401K programs are somewhat limited from an investment standpoint. You may only be able to invest in a select list of funds and investing in individual stocks is usually out of the question.

Roll Over Your 401K Into an IRA

Finally, the last and perhaps best option would be to convert the old 401K into an individual retirement account. This is beneficial because you won't lose a huge chunk of money in comparison to cashing it out, and turning it into an IRA means you can once again add your own money to the account and make investments in a wider selection of stocks and funds.

Contact a professional in 401K rollover consulting today for more information.