There are both pros and cons to a 401K transfer. Among the pros are the fact that a person who opts for a transfer can avoid taxes and penalties for early withdrawal of the money in his account and continue to experience growth on his investment. He may also find it easier to keep track of his investments after a transfer. As far as the cons are concerned, however, a person who opts for a transfer won't have access to a lump-sum payment as he would with a cash-out, and he may find his investment options more limited in some cases. Additionally, a person who opts for an Individual Retirement Account (IRA) may lose the option of borrowing against his retirement investment.
One of the pros of a 401K transfer is that an investor is able to continue investing and accumulating money for retirement. This may prove particularly important if a person has many more years of work ahead of him before he retires. If he had to cash-out his 401K, he might spend the money he received on less important things and ultimately end up with less money to fund his retirement needs.
Another one of the pros of a 401K transfer is the fact that a person who transfers his retirement investment isn’t subject to the financial penalties that typically go along with early withdrawals. For example, a person will not have to pay a tax penalty when he transfers his 401K investment rather than cashing it out. He will usually avoid the 10-percent early-withdrawal fee that is assessed in such cases as well.
A person may also find that a 401K transfer makes it easier to keep track of investments. For example, if a person chooses to transfer to his 401K to his new employer’s 401K plan or similar investment, he will only have to keep track of retirement investments with his new employer rather than dealing with the investments of a new 401K and his old account. A person may also take the option of transferring his 401K to an IRA, however, instead of a 401K with a new employer. In such a case, he may enjoy the flexibility of choosing his own investments and the ability to control his own funds without the services of a 401K provider.
There are also some cons to a 401K transfer, which may depend on the investor's unique situation. For example, the fund choices may be limited when a person transfers from one 401K to another. The old account may offer many investment choices while the new 401K may offer just a few. A person who transfers a 401K won’t have access to the lump-sum amount he would enjoy if he cashed it out. This may prove to be a con if he is in need of cash. Additionally, an investor may be limited in the withdrawals and investment exchanges he can make after transferring to a new plan.
A person may also consider the cons of a 401K transfer if he is transferring to an IRA. In such a case, an investor is typically unable to borrow against the assets in the account, and he may face annual fees. An IRA may also have limited protection against creditors, depending on the jurisdiction's laws.