Moving your 401K balance to ROLLOVER IRA account when you leave a job.

You have your 401K account with your current employer. You have been contributing to it and your employer has been matching your contribution. Now over a few years your 401K has a considerable amount. You start thinking about leaving your current job and want to have a clear plan for your money in your 401K account.

You have four options.

1. Cash out your 401K account, pay the applicable taxes and 10% penalty.
2. Leave your 401K account at the employer and you don’t have to do anything.
3. Move the money in your 401K account to your 401K account with the new employer.
4. Open up an ROLLOVER IRA account and move the money in 401K account to it.

I reviewed these 4 options when I was at the same point in my career. I chose to open an ROLLOVER IRA account and move the money in my 401K account to it. Here are the reasons why I did it.

• Cashing out and paying 10% penalty wasn’t logical to me. I would have done it if I had no other funds to support myself but that was not the case. This is my retirement fund and I wanted to invest for the long term.
• I didn’t want to leave 401k account with my previous employer as that employer administered 401K plan wasn’t so great. Since I was moving on I wanted to do something where I had many more choices in investments.
• I didn’t want to move the funds in previous employer’s 401K fund to new employer’s 401K fund due to the limitations in funds of an employer administered 401K plan.
• Finally I had a Winner! I opened up an ROLLOVER IRA account and moved my money in the 401K to it. I could invest in any stock or ETF I wanted to. It was just like a brokerage account except you pay the taxes when you cash out same as a 401K account. Early withdrawals attract 10% penalty.

When I put in the application to transfer the money in the 401K account with the brokerage firm, they sell the current fund in the 401K account in a couple of  days after receiving the application and move the cash to the ROLLOVER IRA account. Since the markets keep moving you could lose some money if the market is down the day your funds are sold. I took the risk as long term gain was more important than the short term loss.  Luckily the day my funds were sold market was up 0.1% so I actually made money there. This was purely luck!

In an ROLLOVER IRA, you will have to pay the transaction fee for buying financial instruments as per the brokerages standard rates. If you don’t want to pay for transaction fee, each  brokerage has their list of commission free funds. They don’t charge a transaction fee but they do have fee which is listed as expense ratio. These funds need to be researched carefully before investing. Just move it!