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A 401(k) is a company-sponsored retirement fund that your employer provides. Money is pulled from your paycheck – if you choose to participate – and put in a retirement account, distributed into holdings you pick.
Some companies will match your contribution, up to a certain amount. For example, if you put in 6% of your paycheck to a 401(k), your company might match 50% of that.
But once you retire, you will face a major decision regarding your 401(k). You'll be able to keep the money in the 401(k), cash it out, or roll it over to an Individual Retirement Account (IRA).
However, if you opt to keep your money in the 401(k), you will no longer be able to contribute to it. Or if you cash out, which is rarely if ever a good idea, you will have to pay taxes and penalties on the money withdrawn.
That leaves the final option, rolling over your 401(k) into an IRA. Here are the five benefits of doing so…
Benefit of Rolling Over Your 401(k) No. 5: You'll Have More Investment Options
The 401(k)s that your employer offers limit you to a small amount of investment options. According to NerdWallet, that could mean as little as "a curated selection of 20 or 25 investments."
But with an IRA, investors can put their money in virtually any stock, bond, mutual fund, index fund, or exchange-traded fund.
Also, by having more options, investors can develop a stronger long-term strategy to successfully grow their retirement savings.
Benefit of Rolling Over Your 401(k) No. 4: You'll Be Less Dependent on Employer Stock
In 2014, the Vanguard Group did a study to look at a number of 401(k)s offered by Washington, D.C., companies that include stock options from the company itself. During their research, they found that in 2011, 9% of plans in the D.C. area contained stock options in the company supplying the plan.
This seems like a good idea. As an employee, you might feel more motivated to contribute to the success of your company when your financial interests are even more in-line with the business than if you just got your salary from it.
However, according to MSN Money, "investors who hold substantial stakes in employer stock court risks on several levels."
And according to Morningstar, "employees who invest heavily in company stock have both their human capital and financial capital riding on the fortunes of a single company; difficulties at their employer could cause their stock shares to sink at the same time they suffer job loss or an income reduction."
Not to mention a 401(k) heavily weighted in a single stock, in this case the employer stock, causes the portfolio to be more volatile than one that is more diverse.
Benefit of Rolling Over Your 401(k) No. 3: You Can Consolidate
According to the Bureau of Labor and Statistics, "the average worker currently holds ten different jobs before age forty." Additionally, the Bureau notes that today's youngest workers will hold 12 to 15 jobs in their lifetime.
That means the average American worker could end up with several different 401(k) accounts. By rolling them all over into a single IRA, investors could easily check in on and change their investments.
Not to mention, if you invest through multiple providers, you may pay more fees than necessary.
And according to Fidelity, "the more assets you have with one financial provider, the more opportunities you may have for reducing or eliminating account fees and lowering investing expenses."