Why You May Want to Open a Rollover IRA if You're Leaving Your Job

by Christy Bieber | Published on Nov. 20, 2021

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A man walking out of an office with box of his things after being let go.

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Could a rollover IRA help you stay on track for retirement savings.


Key points

  • Many employees have a workplace 401(k).
  • You may not want to leave the money invested with a past employer after leaving a job.
  • A rollover IRA provides an alternative that allows you to avoid tax consequences.

If you are leaving your job, there's a lot of things to think about to make sure your financial ducks are in a row. One of the most important steps that you may need to take upon departing from your current position is to open a rollover IRA.

A rollover IRA is a special type of investment account that you can open at most brokerage firms. But why would you need one upon leaving your job? Here's what you need to know.

Why would you open a rollover IRA after leaving your job?

Opening a rollover IRA gives you a place to move your 401(k) funds after departing your job.

See, many people invest in a workplace 401(k) for retirement. Money you put into this account is yours to keep. And your employer may also make contributions that are yours to keep as long as you are fully vested (your employer's policies set the vesting schedule).

When you leave your current job, you can usually keep your money invested with the company 401(k). This isn't always the case, though. If the business is shutting down and will no longer be administering a 401(k) plan, you may not be able to keep the money invested in your current account. And if your account balance is pretty low, you may also need to move your money.

Even if you can keep your money in your current 401(k), you may not want to for a few different reasons:

  • Having a bunch of old 401(k) accounts floating around could increase the chances you forget about some of them and lose access to some of your retirement money.
  • It's harder to keep track of your asset allocation if your retirement investments are spread around a whole bunch of different accounts
  • Your 401(k) may have high management fees, which eat into your potential returns
  • 401(k) accounts typically have very few investment options

You also have the option of taking the money out of your employer 401(k).

You don't want to just withdraw the funds though. This could lead to an early withdrawal penalty, taxes on the distributed funds at your ordinary income tax rate, and the loss of opportunity to invest for your future.

And, while you could roll the money into your new employer's 401(k), this could also leave you in a situation where you're paying high management fees and have limited access to different kinds of investments.

Opening a rollover IRA could be the best solution for managing your 401(k) money. You can move your money from the 401(k) into the rollover IRA without incurring any kind of tax penalty. And, you can pick what brokerage firm holds your new IRA. You can then invest the money in any assets the brokerage firm offers so you'll have a lot more flexibility.

If you want more control over what you're investing in, start researching rollover IRA account options as soon as possible. When you make a plan to leave your current position, open one ASAP so you're ready to move your 401(k) over into the new account when you quit.

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