Your best option when you’ve severed ties with your previous employer is to opt for a rollover 401k. A 401k rollover is the best option because you are allowed to transfer your already existing retirement account to another account without being taxed or penalized for doing so. It’s a pretty seamless transition that helps you continue to grow your retirement funds without a big chunk of your money going to the tax man,which would happen if you chose to take a premature distribution also known as a cash distribution before the allotted age of 59 ½.
What happens a lot of the time is people will either leave their money sitting in their current 401k plan with their previous employer or cash out early simply because they do not understand how to rollover their money. While leaving your money with your previous employer is a better choice than cashing out, if you continue to do this with each job you will have multiple accounts all over the place that are not being managed as properly as they could be. This is why participating in a 401k rollover is the smartest option to choose.
Going with a brokerage account will give you a lot more flexibility with your money over a typical 401k with your employer. With a typical 401k you have limited options to mutual funds and index funds. If you do not have a great understanding of investing or you are fine with the options provided to you by your employers 401k plan then this may be a good situation for you. If you want more investment options then you will benefit from a brokerage account. With a brokerage account you have the ability to benefit from ETF’s or Exchange Traded Funds. ETF’s are traded like stocks and you have a lot of options to chose from, thousands to choose from. They have low expenses and there are no investment minimums which make these an extremely attractive retirement investment. A brokerage IRA offers a great amount of flexibility not only with ETF’s but you can also purchase mutual funds, individual stocks & bonds and in most cases CD’s.
The first thing you want to do is pick a brokerage firm to rollover your 401k into. There are a lot of financial institutions where this can be completed at, however be sure to check out various discount brokers as they tend to have trades with no or lower commission. Do some research with various companies and find the best fit for you. You will receive a form that will authorize the direct rollover of your funds into the newly opened account.
Of course there is a disadvantage to a brokerage IRA, despite the many benefits. The greatest disadvantage is the cost. When you have a brokerage account you will be charged a fee every time you place a trade with most brokers, unlike most mutual funds where they have a built-in expense ratio. Another cost is if you decide to trade an ETF you not only pay a trade commission you also have recurring operating costs built into it. So with the flexibility comes a little bit of a price but sometimes the cost is worth it. If you want to avoid a lot of these fees research some discount or free brokerage firms.