In an ideal world you would start your working career with a 
great company in your early 20s, steadily climb the corporate 
ladder, retire at age 65, and draw a sufficient income from 
your accumulated 401k account to live happily ever after.

Unfortunately, that’s not how the real world works. If you are 
like most people, you will change careers, or at least companies,
several times. Each time, you'll be faced with the question of 
what to do with your accumulated 401k benefits.

You will likely have a few choices: keep your 401k with your old 
employer (sometimes possible), roll the proceeds into your new 
employer's 401k plan, or put them directly into a self-directed 
IRA at a brokerage firm of your choice.

Since leaving your 401k with your ex-employer has no benefits 
whatsoever and most employers will prefer you transfer out 
anyway, that leaves only the last two as viable options:

1. Roll your 401k proceeds into the new employer's 401k plan of 
   (if allowed)

This is the most painless solution and the one that does not 
require much decision making. While this is certainly acceptable,
there is a bigger picture.

The ultimate goal of having a 401k plan is to provide you with 
a comfortable retirement. To accomplish this you really need a 
wide variety of investment choices and the opportunity to move 
among them in response to market variations.

Most 401ks are limited to maybe 15 mutual fund choices which 
rarely change, even if market behavior dictates they should. 
Additionally, the canned advice provided through plan sponsors 
is generally not terribly useful.

The only benefit to this type of rollover is that if your plan 
has a loan provision, you’ll be able to borrow funds easily.

2. Roll your 401k proceeds into a self directed IRA

This is the preferable solution for most people, and with it 
you again have two choices: roll your 401k into a “Contributory” 
or a “Rollover” IRA.

   1. Contributory IRA

Once you roll your proceeds into this type of IRA, you may still 
contribute annually if you qualify (check with your accountant). 
However, the 401k portion can no longer be rolled back into 
another 401k with a new employer, should you ever want to do 
that. So you eliminate the possibility of using the loan 
provision with those funds. While it is possible to borrow 
against an IRA, it’s more limited than borrowing against an 
employer 401k. Check with your tax preparer for details.

   2. Rollover IRA

This type of IRA allows you the most flexibility. You may roll 
the proceeds back into a 401k plan if you want to utilize a loan 
provision. However, for tax reasons you should not make annual 
contributions to this IRA. If making annual contributions 
becomes important to you, simply open another contributory IRA.

Since Rollover IRAs are usually set up at a brokerage firm, 
you’ll have access to their entire universe of mutual funds. 
With this type of IRA, you can also employ an independent 
investment advisor to manage the account for you. (Yes there is 
a cost for that, but an effective advisor will more than make up 
for that in greater returns than you would get without him or 
her.)

Most of my clients have found that the investment results we've 
obtained with their personal IRAs were far superior to those 
yielded by their employer 401k plans or their personal investing 
efforts. This has been mainly due to a combination of better 
choices and a methodical approach to investing which has kept my 
clients in the market during good times and out of it altogether 
during severe declines.

Bottom line: Rollover IRAs offer opportunities to maximize 
benefits and provide flexibility not usually available with 
employer 401k plans.

© Ulli G. Niemann