Rollover to an IRA: Weighing the Pros and Cons

ByAshley Hours Categories Financial Literacy

If you’ve switched jobs before, you probably have an old 401(k) you haven’t looked at in years. Maybe this was from your most recent job, or maybe you’ve had four jobs since then and lost track completely. You’re not alone. The average working person holds well over a dozen jobs in the course of their career. Forgotten 401(k)s are one of the most common loose ends in personal finance. 

At some point, a friend or family member will probably tell you to just “roll it into an IRA.” That’s one option, and often a good one, but it’s worth knowing that most plans actually let you keep your money where it is. People just rarely choose to.

So, how do you decide which route is for you? Let’s break down how to weigh the pros and cons for your specific situation.

 When you leave a company, you have three options:

1.Leave Your Money in Your Old Employer 401(k)

2.Rollover To a Self-Directed IRA

3.Pull The Money Out of The 401(k) Account

Note: Cashing out before age 59 ½ triggers severe tax penalties and income taxes, making it an option to avoid whenever possible

For many people, consolidating their old accounts into one self-directed IRA account is the best way to simplify their financial lives. If you leave multiple accounts behind it’s easy to lose track of logins, forget to update your mailing address, leave out-of-date beneficiary designations, or miss important plan updates.

Why Moving Your Money to an IRA Gives You the Advantage:

  1. An IRA offers you more control

With an IRA, you are able to access a wider range of low-cost index funds, individual stocks, ETFs and open architecture.

  1. You Have Less To Manage

Consolidating into one IRA means one login, one asset allocation, one rebalancing decision instead of four. 

  1. Avoid Forced Distributions

 Some plans require a “force-out” (cashing you out of rolling your money into a designated default account) if your balance falls below a certain threshold after termination. Checking your plan documents early helps you take control before the company decides for you.

  1. The Fees May Be Lower

Some employer plans negotiate pricing that is hard to beat, depending on your company plan. The only way to know is to pull your 401(k)’s fee disclosure and compare it against what an IRA would cost.

When Might Leaving Your 401(k) As-Is Make Sense?

While an IRA rollover is a popular choice, it’s not always the best for everyone. A few scenarios where keeping your money in your old plan, or moving it into your new employer’s 401(k) might be advantageous include:

  1. Institutional Pricing & Negotiated Fees: Large corporate 401(k) plans sometimes leverage their scale to negotiate low administrative fees that are hard to beat in an individual retail account.
  2. The Rule of 55: If you leave your job in or after the calendar year you turn 55, you can potentially take penalty-free distributions from your employer’s 401(k). 
  1. Legal & Creditor Protection: Federal law (ERISA) provides sound protection for 401(k) plans against bankruptcy and most lawsuit judgments. 

Making the Right Choice for Your Money

Deciding what to do with an old retirement plan is never a one–size-fits all choice. The optimal move hinges on your specific financial situation. Because rolling over funds affects your personal finance ecosystem, it is essential to review your options with a financial professional. A dedicated advisor can help you analyze plan fee disclosures side-by-side, assess your income needs, and create a wealth strategy built specifically around your life and goals.

There’s no single right answer, the best choice depends on your fees, timeline, and how close you are to retirement. If you’d like help reviewing your options, our team at Sherman Wealth is committed to helping you build a financial plan that evolves alongside your life. Email info@shermanwealth.com with any questions or book a complimentary intro call here.