Rolling over 401k to an IRA after changing jobs

So you got a new job and you are thinking (or in some cases not thinking) about what should you do with the 401k account at your old job. Options you have are:

1. Do nothing and leave it as it is
2. Transfer it to the 401k account with the new employer
3. Open an IRA account & transfer it
4. Withdraw the amount & pay taxes + a penalty

Option 4 should be exercised only under exceptional circumstances. Option 1 & 2 are decent options but not the best in my opinion and the reasons are:

1. Limited investment options
2. Limited control
3. High fees

That leaves us with option 3, which in my opinion is the best option. I like to have control over my money and pay low fees. Both these objectives can be achieved by opening an IRA account. Let me explain what I mean by having control over my money – with an IRA account I have the option of buying any stock or fund that is traded in the stock market (not possible in a 401k account). I can also choose to sit in cash if I want to. If at some point I feel like the markets are over valued, I can sell and sit in cash. Wait for the markets to come down and invest again. Regarding fees, lets compare a low-cost Vanguard 500 fund to a mutual fund. Yearly expense for the Vanguard fund (VFIAX) is 0.04% and for the T. Rowe Price dividend growth fund (PRDGX) is 0.64%. That means on an investment of $10,000 the fund will charge $4 & $64 per year (estimated) respectively. Over 30 years these fees can substantially reduce the returns. Now, lets see the performance of these two funds:

Vanguard is a clear winner – higher returns & lower fees. You can do similar comparison between different funds on Vanguard’s website*.

To transfer funds from the 401k account to the IRA account, open an IRA account (Visit how to open an IRA account) and call customer service of your 401k account to request transfer. You will have to provide details of  your new IRA account. They will either send you a check payable to the new account or may be able to transfer money electronically to the new account. Congratulations, now you have better control of your investing destiny. Happy Investing!

Disclaimer: These are my personal views and are for educational purposes only. I am not a financial advisor.