401k Rollover to a Mutual Fund Company

This first option involves you doing a 401k rollover to an IRA with a mutual fund company, such as Vanguard, Fidelity, or American Funds. This means that your old employer will send the funds from your 401k to the mutual fund company of your choice, and then you’ll choose how you want the money to be invested at the mutual fund company. Rolling the money into a Traditional IRA means that there are no tax implications.

Pros: There are a couple of advantages to rolling your 401k into an IRA with a mutual fund company. If you want some options in picking your investments, but do not want to have to make too many decisions, then going with a mutual fund company is a good “middle of the road” option. You’re limited to the funds provided by your particular fund company, but you will have far greater selection than you would have in a typical 401k plan. In addition, many mutual fund companies have standard investment plans for retirement accounts that are based on your age. All you have to do is tell the company how long you have until retirement, and they can invest the money for you automatically.

Cons: The factors that make this option attractive to some people are going to be the very factors that make it unattractive for others. Going with a particular mutual fund company means that you are limited to the funds provided by that company. If you want a greater selection as far as investment options, then you don’t want to roll your money to a mutual fund company.

401k Rollover To A Broker

Rolling your money into an IRA with a broker is going to give you the greatest freedom in choosing how your money is invested. This is also the best option if you want to invest in things other than mutual funds, i.e., stocks, bond, ETFs, options, etc.

Pros: The whole wide world of investment options is open to you.

Cons: If you don’t have much experience with investing, or if you don’t want to spend some time regularly reviewing and updating your investment choices, then this isn’t the best place to roll your 401k. Some full-service brokers will provide you with solid investment advice, but if you’re looking for someone to hold you hand, a mutual fund company may be more up your alley.

401k Rollover To A Roth IRA

The last 401k rollover option in this category is rolling your 401k into a Roth IRA. It’s very similar to rolling it into a Traditional IRA, as you would do it either with a mutual fund company or with a broker, but it has some very distinct tax implications. The money that you put into a 401k is not taxed, and your contributions and earnings are taxed when you begin to withdraw the funds. This provides you with a nice tax deduction now, but you pay taxes on it all later. A Traditional IRA works in just the same way, which is why you can roll your 401k into a Traditional IRA with no tax implications.

Roth IRAs are different in that the money that you put into them is taxed now, and you can later withdraw your contributions and earnings tax free. When you do a 401k rollover, you have the option of moving your money into a Roth IRA instead of a Traditional IRA. You would essentially pay the current and accumulated taxes at the time of the deposit, and then your money would be able to grow tax free (and you’ll be able to pull it out tax free when you retire).

Choosing whether to roll your money into a Roth or Traditional IRA is a question best answered by your accountant and financial planner. Essentially the question comes down to whether you think you’ll be paying more in taxes now or later. If you’re in a low tax bracket now, it may be worth the initial expense to convert your 401k into a Roth IRA.