Top 5 Reasons for a 401k Rollover - Yolo Federal Credit Union Skip to main content

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Many employers offer retirement benefits such as 401ks. But when you leave your job, what exactly should you do with your current retirement plan set up by your previous employer? There are a few options available to you:

    • Cash it out.
    • Leave it.
    • Transfer it to your new employer’s 401k plan (if one exists).
    • Roll it into an Individual Retirement Account (IRA).

So, which is best?

You’ll probably want to scratch off the first option. Cashing out your 401k may come with taxes and other penalties that could be financially staggering. For most people, rolling over a 401k to an IRA is the best choice for a few different reasons. To help you see the benefits of a 401k rollover, we’ve put together our top 5 reasons below.

More Options

Your employer-sponsored 401k plan is picked out by your employer, meaning you’re limited in your choices with how you invest. You likely will have a choice of a few mutual funds—mostly equity funds and a bond fund or two. IRAs, however, offer more investment options, including mutual funds, individual stocks, bonds, and exchange-traded funds (EFTs). You’re also able to buy and sell your holdings anytime you want, unlike with a 401k plan, where you may be limited to the number of times a year you can adjust your portfolio.

Better Communication

If you leave your 401k plan with your current employer, communication with your plan administrator may be difficult—since you no longer work there. Having access to information about your plan is critical, especially should something happen at your old workplace. With a financial advisor, you’ll be able to review your retirement portfolio regularly so you can make the best decisions for your goals.

Lower Fees and Costs

You’ll first want to crunch the numbers, but rolling over your 401k plan to an IRA could save you in management fees, administration fees, and fund expense ratios—all the costs that could eat at your investment over time. Though your IRA won’t be free of fees either, it’s important to consider your current 401k plan’s costs and include this in your decision-making process.

Fewer Rules

The rules for 401k plans vary from employer to employer, and there is a lot of leeway in how they set up their plans, whereas IRA regulations are set by the Internal Revenue Service (IRS), and most brokers follow the same rules across the board. Additionally, rules for distributions are also something to consider. The IRS requires 20% of the distribution from a 401k to be withheld for federal taxes*. With an IRA, you can choose whether to have tax withheld and the amount to be withheld.

Estate Planning Advantages

Your 401k plan may be paid in a lump sum to your beneficiary upon your death, which could cause income and inheritance tax headaches. This depends on your particular plan, but most employers prefer to distribute the funds quickly. While inherited IRAs have regulations, too, there are more payout options available to your beneficiary.

There is no one-size-fits-all when it comes to 401k rollovers, and you’re going to want to find the path that best suits your needs and helps you achieve your retirement goals. If you’re looking into doing a 401k rollover or would like more information about the pros and cons, CFS** Financial Advisor Monaye Morgan-Nelson is here to help. Schedule a no-cost, no-obligation appointment with her today!


*For details about taxes and tax deductions, consult your tax accountant.

**Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk, including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

Before deciding whether to retain assets in an employer-sponsored plan or rollover to an IRA, an investor should consider various factors including, but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.

Holiday Closure

In observance of Presidents Day, our branches will be closed Monday, February 19, 2024. For your convenience, ATMs, the Access Line, and Online Banking platforms will all be available. Branches will reopen on Tuesday, February 20, 2024, at 10 AM.

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