401k Rollover To IRA – Why Bother?
We all have them: the 401k’s that we received in benefits packages from our employers. The trouble is that we may have more than one. Or perhaps, we have only one, but we work at a different job now and that 401k is orphaned. What to do? A 401k rollover to an IRA probably makes sense if you’re looking to consolidate your retirement portfolio.
Rollover is a term that financial professionals use to mean a transfer of funds from one account to another that is similar in structure from a tax perspective. A 401k is intended for long-term savings and is invested pre-tax. Traditional IRA contributions are deductible on your current year tax return. Both accounts are taxable upon withdrawal after age 59.5 when your marginal tax rate will (presumably, but maybe not) be lower. From an IRS perspective, these funds are similar, so you can rollover funds from one to the other without any tax implications.
Simplicity and flexibility are the reasons that you might choose to switch funds from a 401k investment vehicle to an IRA. Simplicity because there will be only one account to monitor where previously you might have had 2 or more accounts to watch – and pay fees on. Flexibility because IRA’s typically offer many more investment options that you can tailor to your risk tolerance. It is quite easy to construct a low-cost, diversified portfolio within most IRA’s and this flexibility can lead to an appreciable increase in your retirement funds.
Of course, there are many factors involved in making a rollover decision. Often it is makes sense to consult with a financial planner about your specific situation and the institutions that offer the right diversification for your needs. You can, however, do it all on your own with the proper research.
401k rollovers only work if the money is moved from one fund to another in a period of 60 days. The safest way to do this is through an institution transfer: the money moves directly from the current financial institution to the new one. If you withdraw the money yourself, taxes are automatically withheld and penalties will apply if the funds don’t find their way to the new financial institution within 60 days since it will be considered an early distribution by the IRS.
401k’s and IRA’s are not created equal, and you must consider your use of them in your particular situation. For instance, you can borrow money from your 401k and pay it back with no penalty. This is good if you might need a loan sometime before you retire. You cannot do this with an IRA. Similarly, once you reach that magical age of 70.5, you must take withdrawals from your IRA, but you can defer withdrawals from a 401k if you stay in the work force. In this case, all of money continues to grow until you do retire.
The rollover of a 401k to an IRA is a great option for taking control of your retirement funds. Do it wisely and you could come out ahead.
RSS Feed
Email
Good advice. I advise most people to roll the 401K over. Most people should do it because they simply do not want to deal with their old employer.
Two good reasons not to.
If you are between 55 and 59&1/2 and will need the money 401K money comes out penalty free IRA money has a 10 penalty.
Another reason is physiological. If you know you do not have the will power to misuse the money leave it with the old employer. I have seen people buy single stocks, penny stocks, options, futures, sector funds and a whole host of high risk investments and lose their savings.
Kyle,
I thik the ability to borrow from a 401k can be more hurtful than helpful. Daddy Paul is right, people will misuse their money if they have access to it. I have an advisor primarily because I know he will knock me on the head if I deviate from our financial plan.
-Dave