Should You Roll Over Your Old 401(k)? Here’s what to consider

Whether you’ve changed jobs or just want more control over your investments, most of us have had to deal with rolling over an old 401(k). Before you take the step, there are several things you should know. First, you have options: roll over to an IRA, roll over to a new 401(k), or cash out.

(Cashing out is generally not a good idea because 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 that there are quite a few pitfalls to avoid in the process. Before you move your money, here are a few factors to consider.

Pay attention to the fees

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

In general, 401(k) fees tend to be between 0.20% and 5%, while IRA fees tend to be lower. ($0 in many cases!) But even a small 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 an annual return of 7%. By the time they are 65, their account balance will look like this with fees of 0.25%, 0.50% and 1.00%:

Data source: author’s calculations.

Just a half-percent difference in costs could cost you $554,828 during your retirement savings.

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Avoid a taxable event

One of the biggest concerns I had when I rolled over my 401(k) was whether it would create a taxable event. A taxable event is any financial transaction, such as selling assets or withdrawing money, that triggers a tax liability, meaning you have to pay taxes on the 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. Make sure you do a direct rollover, where the money is transferred directly from one account to another.

If the check is made out to you and you then deposit it into your 401(k) or IRA, it could result in a mandatory tax withholding. A direct rollover (where one retirement account provider sends the money directly to another 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 such as retirement calculators, market research, and educational content can help you make smarter decisions about your retirement. If these are important to you, make sure the plan you’re switching to offers the same or more robust tools.

Think about 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 may give you access to a broader range. And if your new 401(k) doesn’t offer the investments you want, switching to an IRA can give you more freedom. IRAs typically offer a broader range of investment choices, including access to individual stocks, high-yield CDs, bonds and ETFs.

Time your rollover well

If you’ve just started a new job, it may be wise to wait until you’re satisfied before rolling over your 401(k). If you are waiting for an employer match or bonus, you may want to wait until the money is distributed before rolling over the bill.

Avoid rolling your money when the market is particularly volatile. If the market makes a big rally while your money is in transit, you could be missing out on potential profits. On the other hand, rolling over when the market is falling can be a good move because you can buy more shares for less.

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