Having a retirement account so you can set aside money for your later years is essential for securing your future. But trying to decide of you should rollover your 401k or keep it where it is may not be the easiest decision to make. Whether you’re simply changing your place of employment or you’re at the point where you’re ready to retire, it’s important to make your decisions carefully. Should you rollover your money into an IRA or should you keep it where it is? The answer to this question will depend on a lot of different factors.

If you’re inclined to follow this suggestion, your next step is pretty easy to do. In fact, research reveals that approximately 95% of all funds deposited into IRAs in the past were actually rollovers from other retirement plans. It seems like a no-brainer and since everyone is doing it there must be something to it, right? It seems like a pretty logical conclusion but few people realize that enhancing your savings is not always so black and white. If you don’t ask the right questions then it is quite likely that you could end up losing precious dollars in the process. Below is a list of important questions to ask when considering doing a 401k Rollover.

Do You Really Need to Do a 401k Rollover?

One thing that many people don’t fully realize is that it is not always necessary to do a rollover. If your money is in an employer’s plan and you’re planning on switching to a new employer it is not a requirement to take all your money with you. It is best to compare both plans and choose the one that will gives you the best returns. If it means keeping your funds where they are, then keep them there for the time being. It will give you time to seek out a more beneficial plan in the future. If you’re unsure how to compare plans then it doesn’t hurt to ask an expert for advice. Financial advisors or your own bank are always available to help you.

If you do decide that your current plan is not up to par and you don’t find another 401k with more promising returns, you also have the option to rollover your funds into a mutual fund or an ETF that shows more promise.

Should You do an IRA?

Many people have tunnel vision and their focus is entirely on the 401k. However, there are other good options that they fail to consider. Whatever choice you make it is important to look at the fine print. Yes, you want to know about the interest rates and the potential for having your money working for you but it is just as important to know about any fees that may be associated with the account. How much they are and when will they be applied. Are there penalty charges for early withdrawals? How much do you have to deposit in the account and how often? Is the new plan at a bank, a brokerage house, or an insurance company?

No matter what type of financial institution holds the account, you must be very careful to find out what type of management expenses and commissions they charge. While they may offer you a sizable interest rate that promises excellent returns too often those rates are eaten up by the countless fees and commissions charged. They may seem nominal on paper but think about how often you will access the account or what type of activity you will have to undertake.

Consider Cashing Out:

It can be very tempting to just cash out on all the funds in your account. This is especially true if your account has accumulated a sizable amount over the years. However, it helps to remember that patience can save you a lot of money. According to federal law, anyone who cashes out a retirement account before they reach 59 1/2, will pay a 10% early withdrawal penalty plus they will have to pay income taxes on the money at a higher rate. This could cost you as much as 40% of your money before you get to spend a dime. Knowing this can help you to keep focused on the end game. Rather than looking at the lump-sum payment of a cash out, it may be advisable for you to keep the money locked up until you can avoid those excessive penalties and find the money you need elsewhere.

Some people believe they can beat the system and see a 401k rollover as a means to get a little extra cash in their pocket. They may only rollover a percentage of their money or they may think that if they pay off their homes and other bills they won’t need as much money when they get older. This kind of thinking could be very unwise. No one knows how long they will live beyond retirement age. As long as the money is in your account it is working for you but as soon as you pull it out it stops gaining value.

You may not realize just how much that can amount to. Consider this, if you were to withdraw $10,000 from your account the penalties would cost you a considerable chunk of money. You would probably lose around $4,000 just in fees and penalties alone. However, that is not all you would lose. You would also lose the compounded interest payments that would have accumulated over the years. Assuming the account was paying 8% interest over a period of 30 years, you would actually be losing around $100,000 for that cash payout you just made. Is it worth it for the $6,000 withdrawal you just made?

When you think of it this way you realize just how damaging an early withdrawal can be even in an emergency situation.

Make Sure You Have the Best 401k Rollover Strategy:

Finally, you want to think about your 401k rollover strategy. Ideally, you want to avoid rolling over from a low-cost diversified 401k that is diversified to a high-fee and commissioned IRA. Always keep your ultimate goal in mind: to amass a sizable nest egg that will keep you solvent in your later years.

There is no reason to rush the decision. Once you have left your job and are now working for someone else, you still have 30 days to make a decision on what you will do with your 401k. It is important that you take this decision seriously as it is one that you entire future will depend on.