When To Take A 401k Rollover Choosing whether to leave your 401(k) money in your old employer's plan or roll it over to an IRA is a tough decision that is often rushed when changing jobs or retiring. Most people know that cashing out is their worst option, but what should you do with your retirement funds if you do keep them invested? Unfortunately, there is no universal answer that is best for each individual's situation, but there are several basic guidelines for everyone to consider. Leaving your money in the employer's 401(k) or rolling it to a new employer's plan will provide more protection for your funds, but with more restrictions on withdrawals and investments. Federal law prevents creditors from accessing funds in a 401(k) plan, but there is no such protection for IRAs. Some states have passed their own laws to protect IRAs, so check the laws where you live if this is a concern.

First, you should make sure that you actually do have the option of leaving your funds in the plan. Employers can close accounts in defined contribution plans with a value of less than $5,000. Accounts less than $1,000 can be directly cashed out and accounts valued between $1,000 and $5,000 must be rolled into a default employer IRA.

One area where 401(k) plans do offer more flexibility than IRAs is in borrowing from the plan. Again, check the terms of your plan document as most 401(k) plans do not permit loans by those no longer employed by the company. Your ability to withdraw funds is severely restricted if you do choose to leave the funds in your former employer's retirement plan. Most plans do not allow partial withdrawals by former employees, so you will have to cash out or roll over the entire account balance if you need to take any money out later.

Investment options are also limited in most company-sponsored 401(k) plans. On the other hand, IRAs usually permit almost any type of investment. This may not be an issue if your employer's plan offers high-quality funds, even if the number of choices is small.

IRAs offer more control over one's funds than a 401(k) or other retirement plan would. One advantage for those approaching the minimum distribution age of 70½ is the ability to designate a non-spousal beneficiary. If a beneficiary younger than the spouse is chosen, the minimum withdrawal will be spread out over that person's life expectancy, reducing the amount cashed out each year. Also, an IRA provides the option of converting to a Roth IRA at a later date.

IRAs also make good sense for people who change jobs frequently. It can be difficult to keep track of numerous employer accounts, so it may be easier to consolidate all of them into one IRA account. Having many small accounts may limit your investment options if any of your funds have minimum deposit requirements.

Whether to roll your funds into an IRA or leave them in your employer's 401(k) plan is a decision that must be made based on your specific financial situation. An IRA may be better for someone who frequently switches jobs or wants more investment options. If creditor protection is a concern, then the employer's retirement plan is the safest choice. As with any financial decision, there is no one answer that will fit everyone's circumstances.