Answers: I have ~$5000 in a 401k from an old employer that I would like to rollover into an IRA or CD but can't decide which is

Okay, so, like many things in finance, there are a few moving parts and terms to be straight on.  I know, not the simple answer you might be looking for, but perhaps a more honest one than you'll find at sales organizations.

First: you should know that there are several types of IRAs.  The type of money in question (401(k) money) might move to a Rollover IRA or be held for a short time in a "Conduit IRA", which is sort of a holding account to keep the money segregated from other IRA money in order to make it easy to move into a new employers Workplace Retirement Plan, such as a 401(k).  I suggest keeping this money separate, and not including it with any other Traditional IRA account you might have.  The reason will become clear in a moment.  I won't get into the other types, since they don't appear to apply.

Next, as a prior respondent illustrated, you should know that what the money is invested in is unrelated to the type of account you own.  In other words, you can own a Certificate of Deposit in lots of different types of accounts, including any type of IRA.

Now that you know about IRA accounts, forget everything I just said.  There are three main disadvantages to IRA accounts.  Knowing that you have access to a Workplace Retirement Plan fairly well determines the outcome of my answer.   1) Your former employer - if they were doing even a halfway decent job of applying themselves - negotiated low investment costs by dangling the greater number of investors in the plan (you have an individual account, the plan had several-to-many accounts).  This equals "purchasing power".  2) Depending on what State you live in, you will almost certainly be giving up great protections afforded to your account by moving it out of a 401(k) and into an individual account.  (You'll be moving from a Trust account, established for you on behalf of the plan, and into whatever sort of Custodial account the sales organization you might be talking to can offer.)  And 3) everywhere that I'm aware of has what are often referred to as nuisance fees on IRA accounts.  In my experience these range from $90 to $150.

In summation: you'd likely be moving into an investment environment with higher management costs, nuisance fees, and less protection (search "ERISA Title 1 Creditor Protection").

Sales organizations will counter the above logic by telling you that you have more investment choices outside of a Workplace Retirement Plan.  While this is generally true, depending upon your plan, it is deceptive.  How many choices do you truly need for something you're not likely to touch for a great number of years.  As well, whey not ask your employer to add whatever it is you feel is missing?  (This last bit assumes you roll the money into a new employer's Workplace Retirement Plan.)  The only bad side: you'll be taking away someone's commission on selling you rollover products.

Lastly; your former employer, if they have a decent Specialist Plan Adviser, will be working on getting you out of the plan, since there is carried cost and liability in letting you remain.  As long as your account balance stays above $5,000, they cannot force you out.  This is protected by law.

Move the money to your new employer or leave it with your former employer, based on your ability to do so.  Whatever you decide, invest a little time in establishing your investment goals.  It's highly unlikely that a CD is actually a part of your long-term investment goals.  Diversify among the investment alternatives offered in the plan.

Good luck, hope you find this helpful!






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