By transferring money from your 401 (k) plan to an IRA, you'll avoid immediate taxes and your retirement savings will continue to increase with tax-deferred taxes. An IRA can also give you more investment options and greater control than your old 401 (k) plan. Whether a 401 (k) or IRA is better for a person depends on the person. A 401 (k) plan allows you to contribute more money each year before taxes than an IRA.
However, an IRA tends to have more investment options, allowing for greater control and flexibility over the account. Keep in mind that a person can have both. Even if your 401 (k) plan allows for regular withdrawals, an IRA may offer more flexibility. Many 401 (k) plan managers don't allow you to specify which investments to sell; instead, they withdraw an equal amount from each of their investments, says Kristin Sullivan, a certified financial planner in Denver.
With an IRA, you can ask the provider to withdraw the full amount from a specific fund and let the rest of your money continue to grow. Why would you switch your savings from an old 401 (k) plan to an IRA? The main reason is to stay in control of your money. In an IRA, you decide what happens to the funds. You choose where to invest and how much you pay in fees, and you don't need anyone's permission to withdraw money from the account.
If the check is mailed to your home address, you can write your IRA account number on the check before sending it to your IRA provider. Some plans offered by small and medium-sized businesses are full of insurance products that charge “egregious fees,” says Mitch Tuchman, managing director of Rebalance IRA, which offers advice and low-cost investment portfolios to IRA investors. Transferring your former employer's 401 (k) plan to an IRA could make it more expensive to take advantage of a strategy to transfer money to a Roth IRA. IRAs held by brokerage and investment firms offer IRA owners more investment options than 401 (k), including stocks, bonds, certificates of deposit, and even real estate.
Employers can also offer a simplified employee pension IRA (SEP) or a simple IRA (employee savings incentive compensation plan) if the company has 100 employees or fewer.