Whenever you leave a job, it’s a good idea to take the money in your former employer’s 401(k) and move it into a new retirement plan. While you may get the option to leave your money where it is, that doesn’t make a lot of sense.
After all, why would you leave your hard-earned retirement savings in a plan sponsored by a company you’re no longer affiliated with? Plus, if you leave your money in an old 401(k), you run the risk of forgetting about it.
Now it may be that you’re considering moving your old 401(k) into the 401(k) plan your new employer offers. That’s not a terrible idea per se. But here are a few reasons you may want to consider an IRA instead.
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1. You may get a lot more investment choices
One major problem with 401(k) plans is that they tend to limit your investment options. You may have a few dozen funds to choose from, but some of those — notably, mutual funds — might come with costly fees.
The nice thing about saving for retirement in an IRA is that you get the option to put your money into individual stocks. That could help you not only build a most low-cost portfolio, but one that’s more conducive to great returns.
2. Your new employer’s plan has no match
A big benefit of saving for retirement in a 401(k) plan is snagging an employer match. But if your new employer doesn’t have this perk in its place, then an IRA may be a better bet.
In addition to the investment-specific fees you might face in a 401(k), you may also be looking at costly administrative fees. So if you’re not getting the benefit of an employer match, then it could pay to opt for an IRA, where you may not be looking at the same expensive administrative fees.
3. Your new employer’s 401(k) has an unfavorable vesting schedule
Any time you switch jobs, there’s always a chance that your new role won’t work out or that you may decide to move on after a period of time. But that could put you in a tough spot from a 401(k) plan perspective.
Some employers impose a vesting schedule for gaining ownership of your 401(k) match. And while some vesting schedules are gradual, allowing you to vest partially over a period of time, others might leave you with absolutely no portion of your match if you don’t remain an employee for a preset period.
Here’s an example. Let’s say your new employer’s plan has a rigid vesting schedule where you must remain employed for three full years to get your match, or otherwise you get nothing. In today’s workforce, three years could be considered a long time to stay put, depending on your role and industry. So in that case, you may be better off sticking to an IRA for the broader range of investment choices and lower fees, since getting your match may not happen.
As a point of clarity, vesting schedules don’t apply to funds you contribute to your 401(k) out of your own paycheck. They only apply to money your employer may be putting into your account.
It’s definitely a good idea to move your retirement funds out of an old 401(k) when you leave a job. But don’t assume that your new employer’s 401(k) is the best place for that money to land. You may find that an IRA makes more sense for a variety of reasons.
