Decide where to move your money
In order to move the money out of your 401(k) account, you’ll first need to have an account opened for that money to move into.
You have two main options:
- An IRA — an IRA is an “individual retirement account”. As the name suggests, it’s an account you open up on your own and it isn’t connected to an employer. If your former employer’s 401(k) is already at Fidelity, you might consider a Fidelity IRA to move the money into. Future contributions to an IRA may or may not be tax-deductible.
- A new 401(k) — you might have an active 401(k) account with a current employer. If so, you may be able to transfer your old 401(k) plan assets into that current account. This isn’t always possible though, and you’ll need to check with your current 401(k) provider and HR person. Contributions to tax-deferred 401(k)s are generally tax-deductible in the year of contribution.
We’ve written a full guide on the five key differences between 401(k)s and IRAs if you’re trying to understand all of the differences.
Ultimately, most people who roll over an old 401(k) do so into an IRA for a few key reasons:
- Not tied to an employer — IRAs are generally easier to keep track of since they’re opened by you at an institution of your choice, like Fidelity, Vanguard, or Betterment. Eligibility tends to be less of an issue with IRAs since you only need earned income to open one.
- A wider range of investment options — your employer-sponsored retirement plan generally has a limited set of investment options consisting of mutual funds only. Some 401(k)s also allow you to hold company stock. With an IRA, on the other hand, you can invest your money in a wide range of stocks, ETFs, and even private assets like angel investments and cryptocurrency.
- Quicker process — according to the GAO, rollovers into 401(k)s tend to be more time-consuming and administratively challenging than rollovers into IRAs.
Think of your IRA as helping you do two key tasks:
- Receive the money you’ve saved in your 401(k) at previous jobs so you can consolidate your savings and keep track of them.
- Grow that money by allocating it to investments that will increase over time.
Regardless of the option you choose, if you have a tax-deferred 401(k), or a tax-deferred IRA, you’ll still be subject to Required Minimum Distributions (RMDs) once you hit age 73.
Also, recall that an IRA rollover is not the same as an IRA contribution. If you choose to move money to an IRA via rollover, this will not count against your annual IRA contribution limits.
The good news? Opening an IRA can almost always be done online and should take you less than 10 minutes if you don’t already have one.
Allocating your IRA savings to investments will help it grow over time.