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What should you do with the money in your 401(k) when you leave your job?
Maybe nothing at all. Your instinct may be to take your money with you by rolling it into an individual retirement account (IRA). And a financial adviser may encourage you to do just that. (Not coincidentally, that adviser might then earn a commission or be paid a percentage of the money in your IRA each year.) But just as there may be valid reasons to empty your 401(k), there may be equally valid reasons to leave your savings alone. It depends on the qualities of the 401(k) and your personal feelings. To help you decide, here are some questions to consider:
Will it cost you more to stay or leave?
Small plans — those with less than $10 million or so in assets — charge an average of about 1.1 percent annually for administrative fees and investment management, according to a 2018 study by BrightScope, which analyzes and rates 401(k)s. If you're in such a plan, you can cut your expenses and improve your investment returns by rolling your money into a low- or zero-fee IRA at a no-load mutual fund company and buying inexpensive funds.
Large plans ($250 million and up), however, can be competitive with the IRAs. They typically offer low-cost index funds or target date funds that allocate your assets between stocks and bonds and automatically shift that mix appropriately as you age. If you choose these investments, your plan might cost you less than 0.5 percent of assets per year.
By contrast, investments suggested by a broker or financial adviser will often cost more than that. In 2016 the Department of Labor issued a rule that, among other things, required advisers to compare the cost of your 401(k) with that of the new IRA investments they recommended. That rule was killed, unfortunately, so it's up to you to learn all the costs associated with the adviser's picks.
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Do you want more choice?
The average 401(k) offers about two dozen mutual funds from which you can create a well-balanced portfolio. It also might offer a stable value fund, similar to a money market account, that pays higher interest rates than you can get on other cash alternatives. With IRAs, you have access to tens of thousands of funds, but I doubt that's an improvement. And there's no stable value option.
How easy is it to tap your money?
Your old employer's 401(k) plan should give you the option of withdrawals at any time, or at least monthly withdrawals. If it doesn't, an IRA may be better.
Are you in your 50s and will you need the money?
In most situations, if you roll your 401(k) into an IRA and then make a withdrawal before you turn 59 1/2, you'll owe a 10 percent tax in addition to the taxes usually levied upon withdrawal. But should you leave work the year you turn 55 or later, you can take money out of that employer's 401(k) without paying that extra tax.
Are you in legal trouble?
Most creditors can't get at your 401(k). But, depending on the state where you live, they might be able to reach your IRA.
Do you like your plan?
If you have low-cost funds that have served you well, and your plan administrator is easy to deal with, why change? Stick with what you know. You can always change your mind later.
Personal finance expert Jane Bryant Quinn is the author of How to Make Your Money Last.