Is it always better to rollover a 401(k) into an IRA? What do you need to ask if you have more than $5,000 in your 401(k) plan? Do you have options? Of course, you do you just need to know what to ask when the time comes. Before you act, you need to be prepared to make an informed decision and not just to act on what someone else has done or told you. While there are plenty of reasons for having the rollover IRA there are also many reasons to keep the 401(k) plan at previous employers.
First ask yourself which has the better investment options. While it is true many 401(k) plans are limited in investment options that does not mean that they are bad. Do your research and homework on the plans offered and see if they are comparable to plans outside the 401(k). One benefit of consolidation of 401(k) plans is the ease of beneficiary designations as they are all in one place.
What are the fees associated with each? Many smaller 401(k) plans have higher fees than what may be found in an IRA. The larger the plan, the lower the fees will be as a rule. That is because the more assets under management, the cheaper they are to manage in theory. Smaller amounts the fees erode the gains more significantly. Look at it this way if you do not believe in the power of compounding of interest or if a small percentage will make a big difference. A $100,000 investment over 30 years with a .3 difference in fees will result in a lower value of about $38,000 in additional management fees. Pay attention to fees and go where they are the lowest with the best possible investment options.
Make sure you do not rollover a 401(k) into an IRA that will charge transaction fees that are in excess of the old 401(k) plan. While I do not recommend trading in a 401(k) plan or IRA these are fees associated with any buying or selling of assets within any account. These fees much like asset management fees can erode any future possible gains you may experience in the account. Always look into these costs in combination with the asset management fees of owning any asset. Know what you will be charged prior to being charged or you will pay the price in the long run.
Know which option offers you the most flexibility over the long haul. With IRA’s you are limited to withdrawals after age 59 ½ or you will face a 10% penalty in addition to any possible income taxes. Unless you have a ROTH IRA or meet the special requirements for an early withdrawal this penalty in your future. However, if you have the 401(k) plan, are over the age of 55 and have retired from your job you may make a withdrawal from the 401(k) before you reach age 59 ½ which is the general practice. This option allows for a little more flexibility and may be a good option for you as compared to an IRA.
What will save you the most on taxes in the fifth topic that must be address in the 401(k) and IRA question. Depending on what was put in the 401(k) may help determine where to go with it after you leave the company. If it is in a mutual fund or similar investment, it may make sense to rollover the 401(k) into an IRA. But remember that you will have to liquidate the investments to move them into an IRA from the 401(k) plan as they do not move assets just money. And always do a direct rollover from company to company and always avoid the check being issued to you as an individual. An example of when you may not want to have the 401(k) moved into an IRA is when you have company stock that has appreciated in value a great deal. Instead of having the funds in an IRA or 401(k) where any appreciation is taxed as ordinary income try moving it into a brokerage account. Here it will be taxed at the original value of the investment, and any gains can be taxed at the lower capital gains tax rate instead of ordinary income.
Now do not think that these five areas are all you need to consider but this serves as a starting point of the things you may need to consider. When you are in doubt, it is always best to seek the advice of a professional financial planner to get the best possible information you can based on your unique situation. Do not think that everyone fits into the same mold but remember you are unique, and your situation is unique. Seek professionals who can assist you in a manner that makes you comfortable and places you at ease.
If you need additional information or have any questions, please feel free to contact me.
