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Roll your savings into an IRA or 401(k)?

It’s easy to just leave retirement savings in a 401(k) account at a former employer.

In fact, 43% of the 401(k) assets owned by workers who left their jobs in the first quarter of 2008 were still with their former employers a year later, according to a recent Charles Schwab study.

Retirement savingsBut there are some very good reasons to move that money into an Individual Retirement Account (IRA) or the 401(k) at a new employer.

If you have the choice between an employer plan and an IRA, how do you know which is right for you? Ask yourself the following questions:

When do I want to retire? You can start making regular withdrawals from a 401(k) earlier than an IRA without incurring a penalty. You need to be 59½ to start drawing down your IRA; but you’re allowed to access your 401(k) savings if you leave your job at 55. .

Will I need emergency access to my savings? You can make penalty-free withdrawals from IRAs for several reasons, including medical bills that are more than 7.5% of your adjusted gross income; or to pay college expenses for you, your spouse, children or grandchildren.

How much do I plan to contribute? In 2009, the cap for what you can contribute to your 401(k) is $16,500, or $22,000 if you’re age 50 or older. IRAs allow you to contribute $5,000; if you’re over 50, you’re allowed to contribute $6,000. So if you’re in a position to stash a substantial sum away for your retirement this year that argues for a 401(k).

What kind of investments do I want to make? IRAs typically offer more investment options, including mutual funds, stocks, bonds and certificates of deposit. 401(k) plans usually have a more limited number of options. If you’re not comfortable with the choices your employer offers, that argues for an IRA.

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  1. Ian said:
    on July 6th at 01:18 pm

    The difference in contribution limits generally doesn’t matter in choosing whether or not to roll your money over into a new 401(k) or IRA. The reason is because you can contribute the maximum amount to both an IRA and 401(k) in the same tax year. So if your new employer offers a 401(k), you can contribute up to $16,500 to that plus another $5,000 to your Traditional IRA (or more to both accounts if you are older than 50).

    I personally prefer the IRA option as it allows me to keep the greatest amount of control over my money and gives me the most investment options.