Wednesday, March 18, 2009

Rolling over 401Ks

With the sharp increase in people switching jobs or losing jobs in the current economy I have been asked more and more recently about what to do with the 401(k) left with a previous employer. There are 4 major options:
  1. You can leave the 401(k) right where it is in the employer's plan, assuming the employer is still around. However, it is probably a good idea to move it because most 401(k) plans restrict what you can invest in to a small set of mutual funds that may not offer very good investments.
  2. You can take it and spend it. The WORST possible option. Really you should only consider cashing out if you are over 59.5; to pay for medical treatment against some life threatening problems; Tony Soprano is after you. And if Tony is just going to break your legs, you might want to think about going that route.
  3. Roll the 401(k) over into an IRA. This may be the best option.
  4. If you are moving to a new job, you can move the old 401(k) to one at the new company if offered. Restrictions may apply depending on the details of the new 401(k) plan.

The big advantage of IRA's is the vast number of options, however those options can be over whelming. Sticking to the basics what I would do is check out the offerings from Fidelity, Vanguard, TD Ameritrade, or E-Trade.

Each of these 4 companies offer IRA's that will allow you to invest in a very wide range of mutual funds and individual stocks. If you plan to focus on mutual funds in the IRA I would go with look at Fidelity and Vanguard. These two fund companies offer a wide range of mutual funds. Look through the family of funds and go with the company where you most like their funds and policies. It will be cheaper to buy funds in the fund family where you have your IRA than buying funds from other companies.

If you want to take a little more control you should look at on-line brokerages for their low fee's on trades. While there are other online brokers, TD Ameritrade and E-Trade are probably the best known, and the ones I have used in the past. You will want to focus on fees, policies, ease of use, etc. when picking the right one for you. E-trade does offer international trades on foreign stock exchanges, which is a nice advanced feature for a low cost on-line trading platform.

If you still feel overwhelmed, then perhaps a retirement fund of funds is for you. These funds of funds are intended to be one stop shopping for retirement savings. For example if you are 35 you might consider looking at the Vanguard Target Retirement 2035 Fund. The idea is that the target retirement fund maintains a stock, bond, cash balance that "appropriately" manages risk as you approach retirement. Vanguard offers a range of the funds to fit the needs of people at different ages. Fidelity has similar options called Freedom Funds.

There are also more complex IRA options, for example using an IRA to buy real estate. If you are a real estate professional, home builder, or just an experienced real estate investor, that might be a good options for you.

See my disclaimer as I am not a financial professional.

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