The Advantages of Converting a 401(k) to an IRA

by Mark Kennan

When you leave a job with which you have money invested in a 401k plan, the Internal Revenue Service rules allow you to take the out the money the money in you plan. However, if you want to continue to reap the benefits of tax-deferred savings, you may want to consider rolling it into an individual retirement account (IRA). Knowing the benefits of such a conversion can help you decide whether it's worth your time to move the money out of your old 401k plan and into an IRA.

Retirement Account Consolidation

When you convert your 401k plan to an IRA, you can consolidate all of your retirement funds into one account. Instead of having multiple statements from multiple financial institutions, you can simplify your retirement savings with one IRA. With all of your retirement savings on one report, it will be easier to tell if your savings are on track for your goals.

Freedom of Investment

When you have money in a company's 401k plan, your investment choices are limited based on the company's plan. With an IRA, you have control over how you invest the money. You can select your financial institution and any investment options, except collectibles and personally beneficial investments, such as investing in a business you own.

Potentially Lower Fees

If you work for a small company, your 401k plan growth may be limited by high maintenance fees. If your IRA offers a relatively low fee, you can save money by converting the 401k plan to an IRA. However, if you work at a larger company that can leverage its size into lower fees, you may pay less by leaving your money in your 401k plan than if you roll the money into your own IRA.

Early Withdrawal Exceptions

If you are under 59 1/2 years old and anticipate having to take an early distribution from your retirement funds, an IRA offers more exceptions to the early withdrawal penalty than a 401k plans. For example, you can take an early distribution from your IRA to pay for college expenses, or up to $10,000 for a first-time home purchase without paying the 10 percent early withdrawal penalty. However, you are still liable for income taxes on the early distribution.

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