Ask a Fool: Should I Open a Rollover IRA With My Old 401(k)?

You have a few options when it comes to an old 401(k).

Matthew Frankel, CFP
Matthew Frankel, CFP
Mar 1, 2019 at 12:00PM
Investment Planning

Q: I have a 401(k) with a former employer and I'm debating whether to roll it into my new employer's plan or use it to open a rollover IRA. Which is the best option?

There's no way to say for sure without knowing more about your unique situation and goals, but there are a few things you should consider.

For one thing, keeping your money in a 401(k) essentially puts your retirement savings on autopilot. On the other hand, while many brokerages now offer robo-advisory services and ready-made portfolio solutions for rollover IRAs, there's still likely to be a bit more effort involved.

On that note, one of the main advantages of a rollover IRA is that you can select your own investments from thousands of stocks, bonds, and funds. This also helps you control the fees you're paying, as your 401(k) funds have underlying investment fees. More choices in a rollover IRA can allow you to construct a more cost-efficient retirement portfolio.

Finally, a major (and often overlooked) difference between the two options is withdrawal flexibility. Rollover IRAs have some ways to tap into your savings early -- such as for a first-time home purchase or to cover college expenses -- that aren't available in a 401(k).

Meanwhile, a 401(k) has some unique ways you can tap into your account before age 59 1/2 if you plan to retire early. Plus, you may be able to borrow against your 401(k), while there's no such thing as an IRA loan.