Saving up for retirement is an essential priority once you begin working. While retirement might seem far away when you’re young, exploring your options and saving up can help you sustain yourself once you retire.
In 2022, a majority (88 percent) of US adults aged 60 and up had retirement savings. Many retirement planning options are available, with a 401k being one of the most popular.
Retirement savings aren’t set in stone. If you have a 401k but want to explore other options, you can transfer your current savings into another account, like an IRA. Here’s how this process can help you.
What is a 401k rollover?
A 401k rollover is a process where you move the fund from your employer-sponsored retirement plan, like a 401k, into another retirement account. A significant benefit of a 401k rollover is that you won’t incur additional taxes or penalties.
This process is typical for people who are changing jobs or retiring. It can also be helpful for those who simply want to move their retirement savings into another investment or savings account.
The Advantages of a 401k Rollover Into an IRA
Why would you want to roll over your 401k into an IRA?
401ks generally have limited investment options, including the opportunity to invest in your employer company’s stock. However, once you leave that company, you will likely no longer see the benefit of keeping your account there.
On the other hand, an individual retirement account (IRA) offers several attractive benefits, as they provide a lot of flexibility and investment options. Here are some advantages of a 401k rollover IRA.
No taxes or penalties
A direct rollover from your employer-sponsored 401k into an IRA allows you to sidestep potentially hefty consequences and penalties that may come with other methods.
A 401k rollover into an IRA enables a seamless transition of funds from one account to another that maintains their tax status. You won’t need to pay taxes until you withdraw the money from your account.
More investment options
One of the most compelling advantages of an IRA rollover lies in its broader array of investment options.
Unlike the limited choices typically found in 401k plans, IRAs allow you to diversify your investments. You can explore several investment asset classes, such as bonds, stocks, mutual funds, exchange-traded funds, etc.
This expanded flexibility allows you to tailor your retirement savings and investments to align with your risk tolerance and broader financial goals.
Potentially lower costs
Another attractive aspect of rolling over your 401(k) into an IRA is the possibility of spending less for the returns you get.
Many employer-sponsored retirement plans include administrative fees and management expenses. These individual fees can seem small, but they add up over time and eat into your total investments.
Transitioning into an IRA allows you to move into lower-cost investment options. These savings could improve the growth potential of your retirement savings.
Option for hands-off management
Managing a retirement plan can be daunting, especially if you have a busy lifestyle or don’t have enough investment knowledge.
Moving into an IRA gives you the option for hands-off management through professional investment management services. One option is hiring a financial advisor who can manage your accounts for you and provide valuable advice throughout your investment journey.
You can also opt for robo-advisors that use algorithms to make investment decisions aligned with your risk tolerance and preferences. They have become significantly popular in recent years. In 2024, robo-advisors managed around $1.8 trillion in assets worldwide.
This hands-off approach helps minimize the stress of investment management while ensuring your retirement savings stay on track to meet your goals.
Take Charge of Your Retirement Goals
The decision to roll over your retirement fund from a 401k into an IRA opens up a gateway to many financial benefits.
As you navigate this decision, consulting a financial advisor or expert can provide valuable guidance tailored to your needs, resources, and goals. Study your options carefully to make wise and confident choices that allow you to secure your financial future.
