Benefits of a 401(k) Rollover before Retirement

Benefits of a 401(k) Rollover before Retirement

If you’re nearing or just starting your retirement, you’re probably wondering how to best use your retirement accounts to fund your well-earned time off. Deciding to rollover a 401(k) to an IRA before you retire can deliver a number of benefits and help you take control of your retirement planning.

Gaurav Sharma, CEO and Co-Founder of Capitalize

Published May 26th, 2021

Table of Contents

Key Takeaways

  • If you’re nearing retirement, odds are you’ve had multiple jobs over the course of your career, each with a separate 401(k) plan. Like many Americans, you may also have multiple retirement accounts in different places.
  • You have the option to transfer your 401(k)s to your own Individual Retirement Account (IRA) before or after you retire - this is called a 401(k) rollover.
  • Rolling over your 401(k) into an IRA can help you take control of your finances before and during retirement by giving you more visibility into your funds and a simpler way to plan your withdrawals to fund your retirement.
  • 401(k) Rollovers may seem complicated, but there are easy ways to get this done to help you on your retirement saving journey.

If you’re nearing or just starting your retirement, you’re probably wondering how to best use your retirement accounts to fund your well-earned time off. For example, 401(k)s can be a great retirement savings tool - the problem is they’re tied to our employers and don’t move with us when we change jobs or ultimately retire. As a result, many people leave behind 401(k)s with their former employers, making it hard to keep track and plan for retirement. Others cash out their 401(k) instead, paying steep taxes and penalties and losing out on the benefit of future compounding growth. However, you do have a third option - you can transfer your funds to an Individual Retirement Account - or IRA - in what is called a 401(k) rollover. Deciding to rollover a 401(k) to an IRA before you retire can deliver a number of benefits and help you take control of your retirement planning.

What is a 401(k) rollover?

Put simply, a 401(k) rollover is when you transfer the funds from your 401(k) to an Individual Retirement Account (IRA).

You can rollover a 401(k) to your preferred type of IRA, such as a Traditional IRA or a Roth IRA. Rollovers can be a great option because you won’t pay taxes or penalties on the transfer in most cases. The destination IRA can either be a new account - sometimes called a rollover IRA - or one that you already have opened. If you open a new IRA, you can choose the best IRA type for you, whether that’s a tax deferred Traditional IRA or a Roth IRA where you pay the taxes upfront on contributions. You can also decide whether you want a self-directed IRA - one where you make the investment decisions - or an automated robo-advisor that will choose your portfolio for you. Finally, there are a lot of IRA providers out there - that means you can choose the one with the fees and investment choices that work best for you.

Benefits of a 401(k) rollover

Rolling over your 401(k) to an IRA before you retire has multiple benefits, especially as you near or enter your retirement years:

1. Consolidate your funds to know where you stand - It helps you know where you stand financially by seeing your consolidated retirement savings in a single account. This way, you can determine how long your funds will last and what kind of lifestyle they can support in retirement.

2. Ease of withdrawing to support your lifestyle when you’re retired - When it’s time to withdraw your funds during retirement, it’s a lot easier if your money is consolidated in an IRA. If you have multiple 401(k), you’ll have to manage many accounts carefully to ensure your money lasts the entirety of your retirement.

3. More Investment options - You will most likely have more investment options in an IRA than in your 401(k), allowing you to customize your portfolio to match your stage in life and adjust over time.

4. Greater visibility and control over fees - You can choose an IRA provider with transparent fees so you know how much you’ll pay, unlike a 401(k) where you don’t have any control over the provider fees.

While those are significant benefits, if you are happy with your old 401(k) plan you can most likely leave your money there. Just make sure you’re not paying high fees and that your employer won’t force your 401(k) off the plan. If your 401(k) balance is less than $5,000, your employer is legally allowed to move your 401(k) to a “safe harbor IRA” which can charge high fees and usually doesn’t have great investment options - without getting your permission first. That’s another reason why completing your own rollover may be a smart idea.

How to rollover your 401(k)

Once you’ve decided to do a 401(k) rollover, the question naturally follows: how do I roll over my 401(k)? The most common method is called a direct rollover. With a direct rollover, your former 401(k) provider will send your money to your new IRA provider. There will usually be some paperwork to complete, but the details vary between 401(k) providers. You may also have to receive and forward a paper check from your 401(k) provider to your new IRA provider. If this feels complicated or you’d just like some help, you may want to consider a service that handles your rollover for you for free.

What if I don’t know where my old 401(k) is?

First of all, don’t worry - this is actually very common! You can reach out to your former employer and ask where your 401(k) is located. You can also use a free tool from Capitalize that instantly locates your 401(k) based on an extensive database of 401(k) providers. From there, you can move forward with the 401(k) rollover process.

Bottom line

As you get closer to retirement, it only becomes more important to have full control over your savings. Once you have your retirement plan in place, consolidating your 401(k)s in an IRA can give you a fuller view of your retirement savings and put you in control of your future retirement income. It will help you spend less time tracking down your own money, and more time getting ready for the retirement you’ve been waiting to enjoy.

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Gaurav Sharma, CEO and Co-Founder of Capitalize

Gaurav Sharma is the CEO and co-founder of Capitalize, a mission-driven fintech company focused on improving the rollover process. Capitalize's free, online platform helps users find their old 401(k)s and roll them over into an IRA at leading financial institutions.

Before founding Capitalize, Gaurav worked for some of the best-known financial institutions, including JP Morgan, UBS, Morgan Stanley, and as an investor at well-known hedge fund Greenlight Capital.

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