Most people have heard the phrase “Rollover”. However, we have found that many people don’t completely understand the benefits of rolling your 401(k) assets into an IRA. After retirement, you’ll need to decide whether or not to rollover your 401(k) to an IRA. Once you are no longer with a specific company, it might be a good idea to move your money to an account that is not tied to your former employer. Here are some reasons to rollover your 401(k) to an IRA:
Cashing out may be a bad idea. Any money withdrawn, not rolled-over to an IRA, from your 401k is a taxable event. You’ll have to pay taxes on the lump sum and potentially a 10 percent penalty if you’re under age 59 1/2. It’s usually better to take distributions over many years to minimize the tax impact. Delaying withdrawals as long as you can also gives your retirement fund more time to grow. Additionally, depending on how your 401k is invested, you may be eligible for certain withdrawal strategies that could significantly reduce tax implications of withdrawing directly from your 401k.
Lower fees. 401(k) plans carry administrative fees which cut into your investment returns. If you roll your money into an IRA, you can usually avoid paying the additional administrative expenses. Also, some 401(k) plans will charge an extra maintenance fee once you are no longer an employee. Check with your company to see if this fee applies to your plan.
401(k) changes. Your 401(k) investment choices, trustees, and fees can all change at any time. When these big changes are scheduled to occur, employers usually hold information sessions to communicate the changes. If you’re no longer an employee these in-person sessions may not be available to you. If you don’t pay close attention to your 401(k) statements, you might not even know the changes happened until after they occur.
More control. Most 401(k) plans have restrictions and limited investment choices. If you roll your account into an individual IRA you’ll typically have the whole range of investment options available to you. Don’t settle for investment restrictions once you’re no longer an employee. Gain total control of your investments.
Employer stock. It’s hard to believe, but many employees still have a large portion of their 401(k) invested in their employer’s stock. Some companies invest their employer contribution straight into company stock. This can expose your nest egg to an unnecessary amount of risk. If your former employer goes out of business you could lose your retirement savings as happened to so many who worked for Enron.
Consolidate and simplify. If you frequently change jobs you may find that you have several 401(k) accounts in many different places. It’s much easier to manage your investments if they are all in one IRA instead of many 401(k)s. A single IRA also makes it much easier to reallocate your investments when needed. Consolidating your 401(k)s will not only simplify your life, but your heirs as well. We have had the unfortunate experience of assisting one of our newly widowed clients in attempting to track down and consolidate all of her deceased husbands accounts. The experience added additional, unnecessary stress to her grieving process.
When leaving a job there are many decisions to be made. Don’t forget to give your 401k the attention it needs. If you have questions about rather or not rolling your 401k into an IRA makes sense, give us a call, we’d be happy to discuss the pros and cons with you.