When you leave a job and want to take your 401k with you, you have two options: rolling over the 401k or cashing it out.

A 401k rollover involves moving funds from one 401k plan to another or to an individual retirement account (IRA). This can help you better track your funds.

Cashing out your 401k involves withdrawing all the funds to use however you want. This offers more freedom but can come with a large tax bill and penalties.

This article will discuss some pros and cons of a 401k rollover to help you decide if it’s right for your situation.

Pros and Cons of Rolling Over Your 401k

Here are some benefits and drawbacks to rolling over your 401k:

Pro: Easier Account Management

If you change jobs several times throughout your career without rolling over retirement accounts, you must manage several accounts across multiple plan administrators.

Thus, one of the biggest advantages of a rollover to a 401k is that it streamlines your retirement account management. All your funds are in one place, making monitoring and managing your savings easier.

Pro: Avoid Taxes and Penalties

Cashing out your 401k could cause you to owe a large tax burden plus early withdrawal penalties in the year you cashed out.

This can put a dent in your cashed-out savings, and then you will have to determine what to do with the remainder.

On the other hand, rolling your 401k over to a new 401k or traditional IRA allows you to enjoy the same tax protections as your previous account.

Con: Less Control Over Funds and Investments

Rolling your 401k over to another 401k limits the investments you can select to the ones offered in the new employer’s plan. This can cause you to pay more investment-related fees, reducing your potential returns.

If you roll over to an IRA, you have more investment choices, but you can no longer roll that account into another 401k afterward.

Con: Funds Must be Reinvested

401k administrators generally do not transfer your investments as-is when rolling your account over. They instead liquidate all your assets and deposit the cash into your new 401k or IRA.

As a result, you cannot just keep the same investments you had in the previous account. You must evaluate the new account’s investment choices and reinvest your cash accordingly.

This can be a significant drawback if you liked your previous investments and if you perform the rollover at a bad time. For example, if you roll over when the market falls, then the market rises after, you may have taken a loss and will have less to reinvest.

How to Know if a 401k Rollover is Best for You

First, assess your eligibility to roll your account to the new 401k or an IRA. Then, consider whether you need the funds now or you can continue saving. A cash-out may be a good option if you are in a tight spot financially and need the cash. Otherwise, a 401k is the wiser choice.

As for picking between a 401k or IRA rollover, look over your retirement goals, risk tolerance, and investment preferences. Furthermore, compare fees, investment choices, and flexibility that both the new 401k and an IRA can offer.

An IRA could be the better option if you want more flexibility and choice. If you want easier account management, consider a 401k.

The Bottom Line

A 401k rollover can be a great tactic to preserve your retirement savings, but it is not without drawbacks.

Rolling over a 401k simplifies account management and lets you enjoy the same tax protections. However, you have less control over your investments and the account when you roll over, and you will have to reinvest all of the funds in most cases.

Overall, it can be a good move for many, but not all. Consult with a financial professional to discuss your options for handling your old employer’s 401k plan.

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