Most workers don't do anything with the money in their 401(k) when they switch jobs or retire. That could be a big mistake.
You may think it will keep your financial life simple, but simplicity may be harder to achieve when you have several 401(k) plans from various employers.
"I'd say 100 percent of the time, when a person has a choice of staying in a 401(k) or rolling to an IRA, they should roll it over to an IRA. You go from a limited investment venue to an unlimited number of investment opportunities that open up," said Peter Mallouk, president and chief investment officer of Creative Planning Inc., recently named the No. 1 fee-only wealth management firm by CNBC.com.
Here are the main advantages of rolling over a 401(k) to an IRA:
Investment choice. With an IRA, thousands of investment choices are available to you: stocks, bonds, mutual funds, ETFs, REITs, alternative investments. The average 401(k) offers about 20 funds, according to research from the Investment Company Institute and BrightScope.
Flexibility and control. If you find that a fund in your 401(k) is not performing well, you may not be able to find another investment option to switch to as easily as you can with an IRA. The flexibility that you have in trading and changing investments within an IRA makes it easier to tailor your retirement account to meet your investment goals.
Wealth transfer. An IRA generally allows you to name multiple or contingent beneficiaries—or even a trust as a beneficiary. If you're married, federal law says your spouse is automatically the beneficiary of your 401(k)—and your spouse must sign a waiver to let you change to another beneficiary. If you're single and haven't named a beneficiary, then the account will go to your estate.