3 Reasons to Roll Your Old 401(k) Into an IRA

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  • Your 401(k) is likely charging you fees every year your money stays there.
  • Many IRAs offer more investment options than 401(k) plan providers.
  • Get organized by rolling over all your old 401(k)s into a single IRA.

Over 24 million Americans own "forgotten" 401(k) accounts.

If you have a 401(k) account with a former employer, you're not alone. Every year, about 2.8 million 401(k) accounts are left behind by job hoppers. But if you're paying management fees, stuck with limited investment options, or forget about the account altogether, leaving your 401(k) plan be could cost you. Why should you consider a penalty-free rollover to an Individual Retirement Account? Read on to find out.

Cut the fees

Just like other service providers, 401(k) plan sponsors charge fees in exchange for their services. These fees can't be avoided while you work with a company, but a rollover after you leave can eliminate them entirely.

The average 401(k) sponsor charges fees as a percentage of assets under management. These fees range between 0.5% and 2%, with an average annual fee of around 1%. While these fees may seem small, they can add up when charged on a large account over multiple years.

Rolling over an old 401(k) into an IRA can cut out these fees altogether. Most top brokers don't manage your assets, and therefore do not charge an asset management fee. Additionally, few top brokers charge an annual account fee. Many brokers have started offering zero-commission trading, meaning that buying and selling investments costs users nothing. By rolling over an old 401(k) account to an IRA, you can potentially reduce your annual fees to zero.

Investment options

We all know that investing is an important way to grow your wealth, but equally important is having access to the right kind of investments. While 401(k) plan providers typically offer a dozen or so investment options, many brokers offer hundreds or thousands of ways to invest your money.

Under federal law, a 401(k) plan must offer at least three investment options to plan participants. Today, the average plan offers between eight and 12 options. Typically, a mix of mutual funds, stable value funds, and variable annuities are available for participants to invest in. If the company is publicly traded, it may offer company stock in the plan. Some plans allow participants to trade stocks, bonds, and ETFs, but this is far from the rule.

IRAs, however, allow users to invest in as many options as are supported by the broker. For many brokers, this opens up thousands of investment opportunities. In an IRA, you can trade mutual funds, ETFs, stocks, bonds, options, and, in some cases, real estate. Almost any type of investment is permitted inside of an IRA, subject to limitations imposed by a broker. In the vast majority of cases, rolling over an old 401(k) plan into an IRA opens your investment options from dozens to thousands.

Set it and don't forget it

You did everything right when investing your 401(k): you deferred your salary, got your company match, invested the balance, and waited out your vesting period. Then, years down the road, you forgot about your account, and left thousands of dollars on the table. Don't let this happen to you -- rolling over your old 401(k) can help you keep track of your hard-earned savings.

In 2021, it was estimated that about $1.35 trillion dollars were in forgotten 401(k) accounts. The average balance of a forgotten account? Over $55,0000. Forgetting about one old 401(k) can be frustrating; forgetting about multiple could cost you when it comes to funding your retirement.

Rolling over old 401(k) accounts allows you to better keep track of your life's savings by consolidating multiple accounts into one. As you continue to change jobs throughout your career, you can continue to rollover 401(k)s from previous jobs into one IRA. In addition to avoiding fees and opening up a world of investment opportunities, an IRA can help you keep track of your money through job changes for years to come.

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