Should You Be Rolling Your 401k to an IRA?
Retirement planning is a crucial aspect of financial planning and deciding where to custodian your retirement savings is a vital part of that process. Upon termination of employment, regardless of if the termination is your choice or not, a decision ultimately should be made. The two most common options for retirement savings once you move on from an employer are moving the money to another employer-sponsored 401(k) type of plan or rolling to an individual retirement account (IRAs). When it comes to deciding between these two options, there are pros and cons to each.
In this article, we’ll explore the benefits of rolling over a 401(k) to an IRA and leaving your 401(k) with a previous employer or rolling to your new employer’s plan. By weighing the pros and cons of each option, you can make an informed decision about the best option for your retirement savings. Whether you’re looking for greater flexibility, lower fees, or professional management, this article will provide you with the information you need to make an informed decision about your retirement savings.
Section 1
Rolling Over a 401(k) to an IRA,
Here are some of the benefits of rolling over your 401(k) to an IRA:
- Wider Investment Options: IRAs typically offer a wider range of investment options than employer-sponsored 401(k) plans, such as access to individual stocks and bonds.
Why is a wider range important:
Wider investment options are a key advantage of rolling over a 401(k) to an IRA. IRAs typically offer a broader range of investment options, including individual stocks and bonds, compared to employer-sponsored 401(k) plans which usually only allow broadly diversified mutual funds. This allows for greater customization of portfolios so that you can build a portfolio that is tailored to your specific financial goals and risk tolerance. With wider investment options, you can make changes to your portfolio as needed to respond to market conditions or changes in your financial situation, be proactive in managing your retirement savings, and potentially find investment options that have a higher potential for returns.
Diversification is another important benefit of wider investment options. By having access to a wider range of investment options, you can spread your investments across multiple asset classes that might not be available inside your 401(k) plan, which can help you reduce risk. This is essential for long-term retirement savings, as diversification can help ensure that your portfolio is not overly exposed to market volatility. When considering your retirement savings options, it’s important to consider the range of investment options available and how they align with your financial goals.
- Lower fees: IRAs can also have lower fees than 401(k) plans, as you have the option to choose among multiple providers and lower-cost options.
- Greater Flexibility: Changes to the Secure Act 2.0 is narrowing the gap between group-related plans, but IRAs may offer more flexibility in terms of contributions, distributions, and required minimum distributions.
- Avoid Proprietary Products: Rolling over a 401(k) to an IRA can also help you avoid being limited to a limited set of investment options selected by your employer, which may include proprietary products with higher fees.
A deeper dive
of why this is important and often overlooked:
Proprietary products, also referred to as in-house products, are investment options offered by some employer-sponsored 401(k) plans exclusively to plan participants. These products may appear to be convenient, but they often come with disadvantages. For example, they usually have higher fees compared to similar investment options readily available in the market, which can have a significant impact on your returns and long-term retirement savings.
Additionally, proprietary products often lack transparency compared to publicly traded investments. This makes it challenging to comprehend the underlying investments, fees, and performance. Furthermore, these products can create a conflict of interest for the employer, as they may receive a portion of the fees charged for these products, which could incentivize them to prioritize their own financial gain over the best interests of their employees. Lastly, limited access to a small selection of proprietary products can restrict portfolio diversification and appropriate risk management.
- Professional Management: With an IRA, you have the option to work with a money manager who can help you select and manage investments based on your individual financial goals and risk tolerance. Hire an RIA firm that has a fiduciary duty to look out for your best interests.
Section 2
Leaving Your 401(k) with a previous employer or rolling to a new employer’s retirement plan can also provide positive benefits:
- No Need to Rollover: Keeping your retirement account with a previous employer means you don’t have to go through the process of rolling over the funds to a new account, which can be time-consuming and have potential tax implications.
- Many employer-sponsored retirement plans offer a diverse range of investment options and age-based solutions, so you don’t have to actively manage your own portfolio.
- Consolidation to your new employer: Rolling your retirement funds in from a previous employer’s plan may simplify your financial life by keeping all of your retirement savings in one place.
- Loan Availability: Some employer-sponsored retirement plans offer the option to take loans from your account, which may not be available in an IRA.
Being a pre-retiree can be important in extreme cases:
This can be beneficial in cases where you may need quick access to funds in an emergency or for a major purchase. The ability to take a loan from your retirement account without having to pay taxes and penalties can be a valuable resource for managing your finances. Additionally, the interest paid on a 401(k) loan may be tax-deductible, further reducing the cost of borrowing.
Additionally, the process for taking a loan from your 401(k) is often simpler and more streamlined than obtaining a loan from a bank or other financial institution. This can be especially important in times of financial hardship, as the loan application process can be quicker and less complicated than other loan options. Moreover, the funds in a 401(k) plan are often invested for the long term and can have significant growth potential, making it a valuable source of funding for short-term needs. Overall, the loan availability option can provide a valuable source of funding while helping you to avoid disrupting your long-term retirement savings.
Recommandation:
Considering the benefits of rolling over a 401(k) to an IRA, such as wider investment options, lower fees, greater flexibility, inheritance benefits, and the option for professional management, it can be a smart choice for those looking to take control of their retirement savings. On the other hand, leaving your 401(k) with a previous or new employer can simplify your financial life and provide professional management, as well as the potential for employer contributions and loan availability. Ultimately, the best option for you will depend on your individual financial goals and circumstances. It’s recommended to seek advice from a financial advisor to help determine the best course of action for your retirement savings.
About Jeremy Reif, CRPS®
Jeremy Reif is an independent financial advisor with more than a decade of experience in the financial services industry. He is also the owner of Point Wealth, LLC, an independent financial planning and investment management firm. With advanced credentials and training in retirement planning and financial planning, Jeremy focuses on helping individuals and families pursue financial independence. Regardless of the services he’s providing, he focuses on talking openly about financial planning, the industry, common questions about retirement planning, and more to help everyday investors gain more confidence in their financial opportunities. Based in Wausau, Wisconsin, Jeremy serves clients throughout the state and can work virtually with clients throughout the country. To learn more, visit http://pointwealthmanagement.com and connect with Jeremy on LinkedIn.
Advisory services are offered through Point Wealth, LLC, an Investment Advisor in the State of WI. Whenever you invest, you are at risk of loss of principal as the market fluctuates. Past performance is not indicative of future results. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.
Point Wealth, LLC is not affiliated with or endorsed by the Social Security Administration or any government agency.