Dave Ramsey Says This Is Your ‘Best Option’ for Your 401(k) When Leaving Your Job

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Don’t forget to make a plan for your retirement account. 

If you leave your job, you need to make an important choice that will affect you far into the future: You need to decide what to do with your workplace 401(k).

If you’ve been investing in this type of retirement plan offered through your company, the end of your employment means you won’t be able to keep contributing to it — and your employer will stop matching contributions as well. But you’ll still have a pot of money sitting there invested and hopefully earning you more money for your later years.

You have a number of possible options on how to handle this account, but finance expert Dave Ramsey believes one of those solutions stands apart and is preferable to all others.

If you’re leaving your job, do away with your 401(k)

When you leave your existing job, Ramsey suggests moving the money from your current employer’s 401(k) plan into an IRA that you open at a brokerage firm. This process is called a 401(k) rollover.

“Most of the time, transferring the money from your old 401(k) into an IRA is your best option,” Ramsey explained. “That’s because an IRA gives you the most control over your investments.”

IRAs offer the same tax advantages as 401(k) accounts do. You still get to see your money grow tax free. And when you contribute to the IRA account, you get a deduction in the year you make the contribution. Do note that there’s no additional deduction when you roll over your 401(k) money into the IRA because you already got your tax savings when you initially made your contribution to your retirement plan.

But, unlike a 401(k) which your employer sets up with a plan administrator of their choice, you can open an IRA with almost any financial institution, since many offer these types of accounts. And once you have opened the account, you can buy pretty much any or all of the assets offered by that financial institution. So, for example, you could buy stocks, bonds, mutual funds, and more with the money in your IRA.

If you kept your retirement account with your current employer’s 401(k), then you’d be limited to the range of investments available in that account — which might be a dozen or fewer funds.

You also have the option of moving your 401(k) money into your current employer’s 401(k) plan if they offer one — but again, you’d be stuck with a much more limited pool of investments compared with if you rolled over the funds into an IRA instead.

Should you listen to Ramsey?

If you have a retirement account from a prior employer, listening to Ramsey is a smart choice.

Rolling over your 401(k) money into an IRA means you won’t get hit with tax penalties for an early withdrawal like you would if you took the money out of your account and didn’t re-invest it in a tax-advantaged plan. And you’ll get the benefit of having more choices with your retirement investing than either keeping your current 401(k) or moving the money into your new employer’s plan.

You should seriously consider this type of rollover if you’ve decided to leave a job and need to decide what to do with your retirement fund.

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