Once you leave a job, are laid off or get fired you should roll over your 401(k) into an IRA. IRA stands for “individual retirement account,” which has similar rules to a 401(k) account. By transferring your 401(k) to an IRA you will delay the taxes on this tax deferred account until you take a distribution at retirement. There are opposing arguments from many consultants regarding whether you should keep your 401(k) with your old company or move it to your new company 401(k). In my opinion, moving and possibly consolidating your 401(k) into an IRA account is the best strategy.
Moving your 401(k) to an IRA is your best option because you will be able to obtain an account that offers lower fees, no trading restrictions, better advisory options and more investment choices. In an IRA you will have access to stocks, bonds, mutual funds, ETFs (exchange traded funds) and money managers that are not available in the typical retail 401(k) account. This increase in investment choices and professional advice will improve your chances of building wealth towards a successful retirement.
The largest advantage of rolling your 401(k) into an IRA is reducing your expenses. Not all 401(k) and IRA plans have high internal expenses, but many do. While the majority of 401(k) rollovers are moved into mutual funds, you may have the option of rolling your plan into a self-directed brokerage IRA. By working out a reasonable fee schedule with your advisor using low-cost products such as index and exchange-traded funds (ETFs) will be your best decision. The impact of these high fees is often overlooked by investors, and eventually can lead to under-performance of your account as the higher fees work against your hard earned returns each year.Your next question may be what is an IRA or Individual Retirement Account and how it compares to a 401k? Below is a great explanation from Sal Khan, Founder of the Khan Academy, comparing the difference between a 401 k and an IRA.
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