I Got Fired – Should I Roll My $600k 401k to an IRA or Keep It with Principal?

Key Points

• A Reddit user is trying to decide what to do with his $600K in 401(k) funds when he loses his job.

• He could leave the plan with his current employer, but he’s not happy with the plan administrator.

• An IRA is probably his best bet due to the flexibility, but he’ll need to consider his long-term IRA plans.

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A Reddit user is trying to decide what to do with his $600,000 in 401(k) funds after leaving his job. It’s a large sum of money, so the poster will want to think carefully about all of his options and ensure that he makes the best choice after considering all the pros and cons.

Here’s what the original poster (OP) needs to know to ensure that the money is in the right place to help him maximize the chances of building the secure retirement he deserves.

Leaving a job means dealing with a 401(k) decision

The Redditor explained that his 401(k) at work is currently held at a financial management firm that he’s not a huge fan of. He did owe $5,700 on a 401(k) loan, so he couldn’t move the money right away. However, he has since paid off that loan and is starting a new job in a few weeks that also comes with a 401(k) plan.

He was told he could keep his money where it is, if he wants to do so, but he’s not sure if he should take advantage of that option or if he should move the money into an IRA or roll the funds over into his new 401(k) plan.

This is a choice anyone leaving a job is going to have to make at some point, so it’s important that the OP carefully consider the pros and cons of each option to decide what makes good sense for his situation.

What should you do with a 401(k) when you leave your job?

Like most people, the OP has three primary options for what to do with his 401(k) after leaving work:

1. Leave the money where it is

2. Move it to a new 401(k) with his new employer

3. Roll it over into an IRA

There are pros and cons to each option.

If he’s happy with his current investments and plan, then leaving the money alone is obviously the simplest approach. However, there are a lot of downsides.  There’s a risk of forgetting about the money, as many people have unclaimed funds in old 401(k)s — although given the size of this account, that risk is low. Managing asset allocation also becomes more difficult if you have funds spread across multiple old 401(k)s, and, depending on the current plan, there may be limited investment options available, and there may be fees that the OP doesn’t necessarily want to pay.

Since the OP doesn’t love the plan administrator, leaving the money where it is likely doesn’t make much sense, so he’ll need to decide where he should move it: A new 401(k) or an IRA. And, again, there are benefits and disadvantages of each of these choices.

Putting money into his new employer’s 401(k) allows him to combine his old account with his new one, assuming he’ll be contributing to his new plan too. Since he’ll have all his retirement funds in one place, he can easily track his asset allocation and make sure he’s exposed to the right level of risk. This is also a simple choice, since he doesn’t need to go out and open an IRA if he doesn’t already have one. The downside, though, is again that 401(k) accounts can have limited investment options and high fees, so this option may also not be ideal.

Opening an IRA, on the other hand, gives the OP the most control over what happens to the money, including the option to invest the funds in any assets he wants, open an IRA that does not charge fees, and being able to keep the account even if he leaves the new job in the future. The biggest downside of this approach is that it could interfere with the OP’s ability to use a backdoor Roth IRA strategy in the future if this is something he’s interested in.

Ultimately, the OP may want to talk with a financial advisor about which approach is going to be best for his situation. This way, he can ensure he’s making the best choices to set himself up for retirement security in the future.

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