A Simple Guide to IRA Rollovers

There's a right and a wrong way to move your retirement savings.

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Scott Holsopple

Whether it's through the voice of a talking baby or a well-known actor, chances are you've heard a commercial or two about rolling over your 401(k). It may sound like a simple thing to do, but with a complicated plan-to-plan rollover process and what the U.S. Government Accountability Office identifies as a system that favors rollovers to individual retirement accounts (IRAs), you've got a situation ripe for confusion as investors struggle to decide what rollover options are best for them.

So how do you know what is the best 401(k) rollover option? This can be a difficult and confusing question to answer, but ultimately the answer depends on your preferences, both as an investor and what you are looking for in your retirement investing vehicle. Not sure exactly what you want? Fear not! Here's a simple guide to help you along as you decide what to do with your old 401(k).

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  • If you love everything about your old plan, its low fees, fund options and accessibility, and you don't mind keeping track of multiple retirement accounts, then keeping your money in your old plan is probably the better option.
  • If you like the simplicity and ease of a 401(k) and you've researched the features of your new plan, including the fund lineup, advisory services and set-up, and found them favorable, then rolling your old plan into your new 401(k) may be a good idea.
  • If you want access to a wide range of funds, enjoy financial analysis and are ready to be fully engaged in the research and be the final decision-maker for the investments you pick, then an IRA rollover could be the best route to take.
  • If you're not happy with the funds in your new plan, but you're a little intimidated by the work involved with picking the right funds from the thousands that are available, an IRA rollover is still a good bet. Just be sure to reach out to an investment advisor if you need help.
  • If you are near-sighted, don't care about having enough money to retire and like taking costly early withdrawal penalties, then a lump-sum distribution is for you. Warning: this is not advisable!
  • Bonus option!

    • If you have decided to roll over into your new 401(k) or an IRA, there is one more consideration, and that is the Roth option. The benefit of Roth savings is that future earnings and distributions are tax-free, provided you meet the distribution requirements (as contributions are either made with or converted to post-tax dollars). If this option is up your alley and your new 401(k) plan offers it, a Roth 401(k) rollover is ideal. If your new plan doesn't and you really want the tax diversification that Roth provides, a Roth IRA conversion following your IRA rollover may be what you are looking for.
    • The rollover is an important process, but it shouldn't cripple you with fear and drive you to make rash decisions. Think about what you want out of your retirement plan and let those decisions dictate your path.

      Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.