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Yes, You Can Roll Your 401(k) Into an IRA (and You Might Want To)

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Feb. 15 2022, Published 4:57 p.m. ET

If you have a 401(k) at your current job, you might be wondering what happens to those savings when you change jobs. As the Financial Industry Regulatory Authority (FINRA) notes, you have options, and you’re legally entitled to at least 30 days to decide how to proceed. And yes, you can roll a 401(k) into an IRA, an individual retirement account.

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That might be a savvy move, as Russ Blahetka, a CFP and the managing director of Vestnomics Wealth Management LLC in Campbell, Calif., explains to Investopedia.

"IRAs open a larger universe of investment choices," Blahetka says. "Most 401(k) plans do not allow the use of risk management, such as options, but IRAs do. It is even possible to hold income-producing real estate in your IRA.”

When changing jobs, you could keep your money in a 401(k), put it in an IRA, or cash out.

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According to FINRA, you might be able to leave the 401(k) money in place in your former employer’s plan, which might be advantageous if that plan offers desirable returns. (Bear in mind, however, that you won’t be able to continue contributing to the old account and that your employer might charge former employees higher fees than they do current employees.)

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Another option is to roll the money over to a 401(k) plan with your new employer, assuming the new plan accepts transfers—and assuming you approve of the new plan’s fees and investment options.

The fourth option is that you could take the cash value of the 401(k), but FINRA warns investors that that course of action is costly. Between employer withholdings, early distribution penalties, and combined taxes, you might lose more than half of the account’s value by cashing out.

There can be advantages to rolling over a 401(k) into an IRA.

Investopedia reports on some of the perks of rolling a 401(k) into an IRA, aside from the aforementioned range of investment choices. IRAs often (but not always) come with lower management and administrative fees, and the rules dictating IRAs are often clearer than those dictating 401(k) accounts, thanks to IRS standardization.

You might also find that you have better access to information about the plan.

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Also, you might have the option of converting your 401(k) account into a Roth IRA, wherein you pay tax as you go—instead of paying taxes when you withdraw the money, as you would in a traditional IRA. (Provisions in the proposed Build Back Better bill, however, target high-income taxpayers who use Roth conversions for tax-avoidance purposes, as Forbes reports.)

If you do choose to roll your 401(k) money into an IRA, The Motley Fool recommends judging potential brokerages by their customer service, research tools, and availability of investments—and, if possible, to choose a brokerage that offers $0 trading commissions and low fees.

Also, know that if your 401(k) funds are transferred to you instead of directly to your IRA, you have 60 days to deposit the money into your IRA before you’ll be charged early withdrawal penalties.

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