Why, and When, You Should Roll Over Your 401(k) to an IRA

October 11, 2021

Many companies offer the employees the option of investing in an employer-sponsored 401(k) plan. However, if you leave the said employer, you must decide what to do with your 401(k) plan; fortunately, you have several options. You can determine if you want to cash it out, leave it in the account, transfer it to your new employer’s 401(k) account, or roll it over into an IRA. For most people, rolling over the 401(k) into an IRA is the best route to take. IRAs aren’t linked to employment and can be opened with any brokerage firm or financial institution. They also have a wider variety of investment selections with more hands-on management. To shed some more light on the subject, we will dive into four main reasons you should roll your 401(k) over to an IRA.

1. More Investment Options

With a 401(k), your choices are limited to only a few in the world of investment. However, with an IRA, you have several investment options available to you. You have not only the possibility of mutual funds but also individual stocks, bonds, exchange-traded funds, and many more. As a result, you get more choices, more responsibilities, and more freedom. Of course, all investing comes with risk, but 401(k) plans don’t allow an investor much freedom to manage their portfolio’s risk. However, with IRAs, you have a little more control over risk factors, and in the case of a self-directed IRA (SDIRA), you gain the added opportunity to hold alternative investments such as income-producing real estate in your IRA.

2. Lower Fee Possibility

Rolling your 401(k) investments into an IRA could save you money in management fees, administrative fees, and fund expense ratios. You also have to factor in the overall annual fee that the plan administrator charges. You can always check with your 401(k) provider to figure out what fees you owe them annually. Then, you can compare numbers to see how much money you would save by rolling your money to an IRA. While your IRA costs won’t be non-existent, you’ll have more freedom and control over how you choose to invest, how much you’ll pay in fees, and where your money is going.

3. Roth IRA

Many individuals choose to move their retirement savings into a Roth IRA account which has many advantages. Some Roth IRA advantages include:

  • Tax-free withdrawals in retirement
    • When rolling your account over, there will be some taxes you’ll have to pay on the amount you’re converting. However, these taxes are less than what you would have paid if you took regular withdrawals from your 401(k).
  • No Roth IRA income restrictions
    • If your annual income is above the thresholds for Roth IRA contributions, you can still roll your 401(k) savings over into a Roth IRA. It can also grant you the benefits of tax-free withdrawals in retirement. Talk about a win-win!
  • No mandatory minimum distributions
    • Most accounts, such as 401(k) or even traditional IRA, require that you take minimum distributions. If not, you’ll have mandated annual withdrawals from your account when you reach the age of 72. However, with a Roth IRA, you’re free of required minimum distributions, resulting in even more control over your retirement savings.
  • Additional death benefits
    • Should you have funds leftover, you can pass down your Roth IRA to your heirs. However, beneficiaries need to draw down the account within ten years.

There are several options to consider when converting, which is why it’s always wise to consult with your financial advisor on what route is best for you and your funds.

4. Fewer Rules, More Freedom

Every company has different rules and leeway in its 401(k) plan, making it difficult to understand and regulate. However, you can count on every broker following the same rules with an IRA because the Internal Revenue Service (IRS) mandates standardized regulations. The IRS plays a different role with your 401(k): 20% of all distributions from a 401(k) must be withheld for federal taxes. Whereas with an IRA, you have the option to have no tax withheld when you take a distribution. (However, most investment experts recommend having some tax withheld rather than potentially ending up with a large tax bill at the end of the year, resulting in possible interest and penalties.)

The bottom line is, if your employer sponsors a 401(k) investment opportunity, seize it! If you have money in a 401(k) from a previous employer, roll it to an IRA! Regardless of your circumstances, investing in your future is always a good idea. Learn more about all of your retirement investment options by visiting RitaUS.org.