What to do with your 401(k) or 403(b) if you leave your job

Why is it so important to roll your 401(k) or 403(b) to an IRA when you leave your employer?

The primary benefit of the IRA, over the 401(k), 403(b) or SIMPLE, is that you have more investment alternatives in an IRA. In a 401(k), unless you are lucky enough to have a self-directed brokerage window, you are probably limited to the mutual funds offered by your plan administrator. In an IRA, you can buy and sell the entire universe of investment alternatives - including all stocks, bonds, mutual funds, options, real estate, and even privately held companies.

While that is the most important reason to roll your 401(k) over into an IRA when you leave, there are others.

If invested properly, your fees will probably be lower in an IRA than a 401(k). Fees are very important for three reasons: 1) reducing fees is risk free return - it may be the only free lunch in investing; 2) reducing fees leaves more money in your pocket to compound over time; and 3) studies show the one thing most correlated with performance, over time, is not the fund manager, the sector, the asset class or the historical performance, but low fees.

As a general rule, fees are inversely correlated to portfolio performance - the higher the fees, the worse the performance. The lower the fees, the better the performance - which is, of course, a very practical reason why you should learn to be your own money manager.

(NOTE: Snider Advisors offers a free online course, called "How to Turn Your 401(k) Into a Million Dollar Nestegg." The nine part course is designed to arm you with the knowledge and step-by-step instructions needed to make the most out of your employer-sponsored defined contribution plan. The goal is to give your plan the highest probability, while you have it, of someday being able to produce sufficient income for you to live comfortably in retirement.)

Another reason to move from a 401(k) to IRA, is easier access to your money, although I'm not sure this is such a good thing. If you want to rob your retirement account, you don't have to ask for permission, nor is there any bureaucratic paperwork. You have a thousand miles of rope to hang yourself with.

There are estate planning benefits as well. While the rules have changed in recent years, allowing 401(k) plans to be stretched by your beneficiaries, it is still up to each individual plan sponsor to write that into the plan document. Some have and some haven't. An IRA custodian that doesn't allow for a stretch after your death is, in my experience, rare. Finally, you can split IRAs between multiple beneficiaries and IRAs are easier to allocate when you have non-spousal heirs.

A transfer of your 401(k), 403(b) or SIMPLE to an IRA is a non-taxable event, so long as you do it properly. There should be no taxes, fees, or penalties.

While you are employed, you have to max out your employer sponsored retirement plan if you can. At a minimum, you should contribute enough to get the full employer match, if there is one. But if there is a silver lining to losing your job, being able to self-direct your retirement funds is one.

Bottom line: Whenever you leave an employer - either voluntarily or not - get that money rolled over to an IRA as soon as you can. Never leave your 401(k) with your old employer, and even worse, never ever roll your old 401(k) money into your new employer's plan, when you are lucky enough to find a new job

Category:

Education

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• roth
• 401(k)
• 401k
• investing
• snider
• snyder
• IRA