Dave Ramsey Says to Take This Crucial Financial Step When You Leave Your Job

by Christy Bieber | Published on Oct. 22, 2021

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Ramsey's advice could be crucial to a secure retirement.

Many Americans are leaving their jobs this year because of coronavirus-related concerns or because they find better opportunities in a competitive labor market. If you're one of the many switching to a new position, personal finance guru Dave Ramsey has some advice about a crucial financial step to take.

Ramsey says to get your money in your own control

In his Guide to Investing, Ramsey urges employees who have put money in a 401(k) to take their money with them when they leave their jobs. Specifically, Ramsey suggests that people with a workplace 401(k) move their money into an IRA.

An employer 401(k) is a popular retirement plan that has significant advantages. Companies often offer an employer match, which means they contribute money to the account on an employee's behalf after the worker makes contributions of their own. There are also tax breaks associated with investing in a 401(k), as money can be contributed with pre-tax dollars.

When you leave your job, Ramsey urges you to move the money out of your employer-sponsored 401(k) and into an IRA because:

  • You have control over your money. When you open an IRA, you're in charge of managing the account. You decide where to invest your money, and can keep tabs on returns. Ramsey believes it's better to be in charge of managing your own retirement investments, rather than leaving your money under the control of a former employer.
  • You have more investment options. Ramsey points out that there are more options in IRAs than in company 401(k)s. Usually, a company 401(k) provides a choice of 10 or 15 investment funds, whereas IRAs give you a choice of almost any asset you want, depending on which financial institution you choose.

How to roll your 401(k) money into an IRA

The first step in rolling over your 401(k) money into an IRA is to find the financial institution you want to hold your new account in. For most people, a discount online brokerage firm makes sense. The best brokerage firms for IRAs offer no-fee accounts with no minimum balance requirements and a wide variety of investments.

After you've found the broker, open your new IRA to get it ready to receive the money from your 401(k). Once that's done, Ramsey suggests a direct transfer, which means that you ask your 401(k) institution to send the money directly to the brokerage firm. Doing it this way ensures that the money remains in a tax-advantaged account.

If you take money out of a 401(k) early, you can be subject to taxes and early withdrawal penalties. And if the 401(k) administrator sends the money to you instead of directly to your IRA, you risk having the distribution treated as a withdrawal.

A direct transfer isn't always possible, because not all brokerage firms or 401(k) administrators allow this. If you can't do a direct transfer, when you get a check from your 401(k), deposit it into your new IRA quickly -- typically, it must be within 60 days.

Rolling over your money from a 401(k) to an IRA is easy, and many other experts agree with Ramsey that it's the best bet. If you're leaving your job, consider this crucial step, and keep your retirement funds in your hands.

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