When leaving a job, it’s important to decide what you’d like to do with the money you’ve invested in your 401(k). There are 3 primary options:
Although each of these solutions allows your retirement funds to keep growing and ensures you don’t get a big tax bill, there are some serious 401(k) to IRA rollover advantages worth considering. In the article below, we’ll recount 10 of them.
1. Consolidation: It’s easier to keep track of your finances when they’re in one place
It may seem hard to imagine that you’d simply lose track of your retirement investments. But this happens far more often than you’d think ─ especially for people who change careers frequently. As of May 2021, approximately $1.35 trillion in assets has been left behind in an estimated 24.3 million 401(k) accounts. Even worse, leaving a 401(k) behind could cost you as much as $700,000 in forgone savings over your lifetime.
An IRA gives you a single place to consolidate your workplace retirement savings every time you change jobs.
2. Control: You can pick your IRA provider
When you signed up for your old workplace 401(k), you probably didn’t have a choice of where the money was deposited. Your employer picked the plan’s administrator and that financial institution was in charge of your account.That’s because your 401(k) is managed by your employer, which means you can lose the ability to contribute when you leave your job, and it could even be transferred without your consent.
Rolling your old 401(k) funds into an IRA, however, ensures that you control where and how you invest your savings. As long as you move the money into a qualifying IRA, you won’t face penalties for early withdrawal, and you’ll experience the freedom and flexibility to open your rollover IRA with the financial institution of your choosing.
3. More options: You’ll have a broader menu of investments to choose from
Your 401(k) investment options are usually limited by your employer, and FINRA reports that most plans only offer a choice of between 8 to 12 funds to invest in. IRAs, however, allow you to unlock a nearly unlimited menu of investment options including stocks, bonds, ETFs, mutual funds, CDs, and even cryptocurrencies. You can even opt for a robo-advisor if you want a more hands-off approach.
4. Lowered costs: You may be able to reduce your investing fees
Investing fees can dramatically erode your returns over time, and the more fees you pay, the bigger the impact. Unfortunately, 2 in 3 Americans don’t know what 401(k) fees they’re paying, which can create long-term problems.
A 401(k) to IRA rollover opens the door to lower-cost investing. The median annual 401(k) fee is .85% of assets, while marketing-leading providers of automated or robo-advisor IRAs typically charge between 0.20% and 0.36% in advisory and investment fees.
Many IRA providers have even eliminated commission fees, as well as inactivity or account maintenance fees. Low-fee ETFs and no-load mutual funds are also common offerings, so you may have the option to not only eliminate administrative fees but also reduce other investment expenses as well.
5. Convenience: It’s easier to manage one account instead of many
If you have several retirement plans, it can be difficult to keep track of all the details. You’ll have to sign into several accounts when rebalancing your portfolio or keeping tabs on investments. You may receive multiple tax forms. Once you’ve left the workplace altogether, calculating a safe withdrawal rate and complying with required minimum distribution rules is made all the more difficult.
A 401(k) to IRA rollover enables you to reduce the number of retirement investment accounts you have, thereby simplifying and streamlining your total financial picture.
6. Peace of mind: You can keep better tabs on your asset allocation
When it comes to retirement planning, it’s crucial to have the right asset allocation.Unfortunately, having multiple retirement plans can make it harder to get a big picture view of your portfolio to ensure your money is invested appropriately given your goals and life stage.
If you’ve completed a 401(k) to IRA rollover and consolidated your investments into one new IRA account, you can see at a glance where all your money is. This reduces the chances you’ll concentrate investments too heavily in one particular industry or that you’ll have too much or too little risk exposure.
7. On your side: Customer service and support are often better
If your former employer is managing your retirement account, it might not be their top priority to answer your questions or respond to requests. When choosing between IRA providers, you can prioritize ones that have robust customer service teams and a strong reputation.
8. Flexibility: You have the option to do a Roth conversion
If you’ve left behind a traditional 401(k) account (as opposed to a Roth 401(k) account), you usually need to roll over directly into a traditional IRA to avoid tax consequences. If you’d prefer a Roth IRA, though, you still have the option to convert your traditional IRA into one.
If you expect your tax bracket to be much higher later in life, taking the tax hit up front to get distributions without an IRS bill later may be a worthy consideration. That’s especially true if your account balance has temporarily fallen in your 401(k) during a market correction.
9. Perks: Some IRAs providers may provide a cash incentive
IRA providers want to earn your business, and to do that, some might offer a financial incentive or other types of benefits to open an account with them.
For example, you might be offered $100 for moving over an account with a balance of up to $50,000 or may be offered as much as $1,000 by investing at least $500,000 in funds in your new rollover IRA. Given the numerous other benefits of 401(k) rollovers, this one feels like icing on the cake.
10. Less complex: IRA rules can be easier to follow
Finally, while IRA rules are standard across firms, and you can review IRS information to learn your rights and obligations, 401(k) rules often vary from one employer to another. The specifics may depend on the policies in place and the account administrator chosen.
If you want to more easily understand exactly how your account works and what the rules are for investing and withdrawing funds, an IRA can be a better account choice than a 401(k).
If rolling over your 401(k) into an IRA is the right choice for you, Capitalize can make this process simple. From filling out forms to following up with your 401(k) provider, our team does it all. We’ll even send you a prepaid, pre-addressed envelope to mail your rollover check to keep the ball rolling. Just click the button below to get started.