There’s no other way to put it: rolling over your 401K into an IRA is one of the smartest things you can do. One advantage that 401K plans offer is that salary reductions into such plans reduce your taxable income and allow the funds to grow while deferring taxes until you take the money out.
Because these plans are offered by many workplaces, you might be wondering why anyone would want to move the money somewhere else when they retire or switch jobs.
Well, here are three reasons:
- There Are Lower Fees – Do you know about your 401K’s fees? Many plans have things like administrative and servicing fees along with investment management costs. A larger plan might have lowered fees because of scale and access to lower-cost institutional share classes, but the fees are not reducing costs. When you roll your 401K over into an IRA, you can lower those fees and keep more of your own funds.
- There Is Flexibility – How many investment options are in your 401K? They usually only have a few — under 20, in many cases. IRAs are different in that they let you invest in individual stocks as well as bonds and exchange-traded funds that let you access entire markets. This can be on top of the options available in your 401K.
- There Is Easier Tracking – Most people will spend their professional lives working for many different companies. Having a 401K at each one makes it easy to forget where you have money, and you can overlook necessary changes to investments as your life circumstances change. When you roll a 401K over into an IRA, you centralize everything on top of widening your options and potentially lowering your costs.
With baby boomers retiring and having questions about their retirement plans, talk about 401Ks has been growing over the past few years. While it’s usually best to roll the plan over into an IRA, there can be some cases where keeping it in the 401K is better.
There is, for instance, the use of loan provisions and the credit protection offered by The Employee Retirement Income Security Act of 1974 (ERISA). You can also avoid the Required Minimum Distribution (RMD) with a 401K plan if you are older than 701/2 and you still work.
Still, in most cases rolling it over is better for most, especially those in their 40s and 50s who are approaching retirement. The wider range of options and lower costs will only help in the long run.