In an ideal world you would start your working career with a great company in your early 20s, steadily climb
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 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 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 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 last two as viable options:
1. Roll your 401k proceeds into new employer's 401k plan of (if allowed)
This is most painless solution and 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 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, 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 preferable solution for most people, and with it you again have two choices: roll your 401k into a “Contributory” or a “Rollover” IRA.
