Is it Better to Rollover to a 401(k) Or an IRA?

Is it better to rollover to a 401k or an IRA

Rollover IRAs provide many advantages over 401(k) plans. You can open one at any brokerage, eliminating the limited investment options provided by some 401(k) plans.

But is it always the best idea to convert your 401(k) funds to an IRA? We will discuss both its advantages and disadvantages here.

1. Tax-deferred growth

Tax deferral is one of the primary advantages of a rollover. Your investment earnings will not be taxed until they’re withdrawn during retirement – meaning your returns could grow faster with this strategy versus an employer plan.

Some retirees prefer having flexibility over their retirement withdrawals and not paying taxes at all, making a Roth IRA the perfect solution. If you need guidance, consult an investment or tax professional.

If you choose to move your money into an IRA, look for one with no account fees and offers low-cost investments like no-load mutual funds and commission-free ETFs. Robo-advisors may be an affordable way to manage and make recommendations for a wide range of investments without paying an advisor’s high costs. Many brokerages also provide cash incentives if you roll your 401(k) into an IRA with them; make sure you follow all instructions provided by your IRA institution’s chief financial analyst Greg McBride from Bankrate.

2. Tax-free withdrawals

Most 401(k) plans provide the freedom of withdrawing funds without incurring income tax or an early withdrawal penalty of 10%; in contrast, withdrawals from an IRA account are subject to taxes and penalties.

Rolling over from an expensive retirement plan into an IRA could also make sense if its fees are prohibitively expensive, including fees charged on purchases or administration costs. You’re more likely to find more cost-effective investments in an IRA where you can shop around for better prices.

Rollovers may also help streamline your life by consolidating multiple accounts into one with a single provider, making it simpler to track savings and manage required minimum distributions (RMDs) starting at age 73. Be wary of investment firms pressuring you into rolling over your retirement account; their motive is likely moneymaking rather than helping your investment portfolio. Some may offer free stock trades as inducements.

3. More investment options

401(k) plans usually offer limited investment choices, while IRAs can provide much broader access to mutual funds, ETFs, individual stocks and bonds. While investing in an IRA may incur higher fees than investing through employer-sponsored plans, your financial advisor can help determine if those extra costs justify having more options for investing.

Switching to an IRA when changing jobs could make good financial sense as it reduces the number of retirement accounts you need to manage and can make tracking investments simpler, preventing duplicate investments and helping keep an eye on required minimum distributions (RMDs).

Consolidating your retirement savings into one account makes it easier for a Certified Financial Planner or investment advisor to track your progress as retirement draws near, especially as one sector or asset class becomes over-concentrated and your portfolio becomes too concentrated. Doing this may prevent overly concentrated investments and ensure it remains adequately diversified.

4. More control

An investor who wants more control of their money may opt to roll their 401(k) savings over to an IRA in order to reduce fees that come with institutional-class funds which tend to be cheaper than retail counterparts.

No rush should be felt when considering whether to convert an old 401(k) to an IRA or just leave it alone; you don’t need to rush your decision. Though investment companies may advertise the need to transfer your savings quickly, this may only be because they’re offering incentives like cash back, additional investments and free trades for you as part of their bid for your business. Unless your 401(k) balance falls low enough that it needs distributing, legal permission allows you to keep saving where they are; plus staying put will allow you to avoid paying taxes and penalties before reaching age 59 1/2!


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