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Why Rollover A 401(k)

Updated: Jul 7, 2021

Have a 401(k) left behind from a previous job? Conversation often revolves around what to do with it. Should it be cashed out? Left alone? Or rolled over into another retirement account? If rolled over, when should it be done, and why? Will it help get you on the path to retirement?

Take the free money

First off, if someone is working for a company who provides a 401(k) or similar retirement plan with a matching contribution, they should be taking advantage of that benefit. Many companies these days do not provide much in the way of a retirement plan or matching contributions. For those who have that option, USE IT! When an employee contributes to the plan, they not only get to save on income tax that year, but any company matching contribution is basically free money — a pay raise contingent on putting some cash away for later use. The employee contribution along with the company’s matching contribution can add up quickly. So the employee should at least contribute up to the maximum company match.


Now eventually everyone leaves their place of work. Either they quit, were fired, or retired. When this happens, there are choices to be made. The account can:

  • Stay in the old company’s 401(k) plan

  • Cash it out, less taxes and any penalties owed (not recommended, although hardships do arise)

  • Roll it over to a plan at the new place of employment

  • Roll it over to a traditional IRA

There are a few other options (like converting it into a Roth IRA), but these are the most widely used options.

Why rollover

While a 401(k) is a great asset to utilize, more often than not it's beneficial to roll it over to a Individual Retirement Account (IRA) after parting ways with the company of employment. With a 401(k) plan, the sponsor usually has just a handful of options for an account owner to pick from. Also, internal fees within a 401(k) might be a factor, compared to any fees related to an IRA.  That said, everyone should always do their homework to find out the specifics of their company’s particular 401(k) plan for themselves. In addition, when an employee no longer works with the company, they no longer receive the match and can no longer contribute. Hence, the rollover to a Traditional IRA affords the opportunity to keep retirement savings consolidated into fewer places.

Benefits of an IRA

Why a Traditional IRA? The tax advantages are similar to a 401(k) and therefore there is likely no tax consequence in making a rollover. While there are other options, those may incur large penalties and taxes owed.

Change can be hard, but enlisting the help of a qualified professional can make the process seamless. With an IRA, the options to be invested in are far greater compared to a 401(k). In many cases, an investor can contribute funds to a Traditional IRA as well and continue saving for retirement. In short, a Traditional IRA gives an investor much more control, and with the right advisor it can be tailored to specific needs and investment preferences. Contact us today to discuss your particular circumstances and how our portfolio building process might be a good fit.

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk and you may lose your principal.

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