Should You Rollover to a 401k Or an IRA?
When changing jobs, it may be tempting to move your 401(k) savings into an individual retirement account (IRA), but this may not always be the right move.
An IRA provides more investment options and lower fees than its 401(k) counterpart, potentially accelerating investment growth faster. Furthermore, an IRA also removes any need to pay taxes when withdrawing funds.
Costs
Some individuals transitioning between jobs decide to roll over their 401(k) into an individual retirement account (IRA). Although doing so may make good financial sense, it’s essential to be aware of any hidden fees which could impact your portfolio negatively; such as management fees for each fund held and administrative costs that can diminish investment returns over time.
Additionally, company 401(k)s can offer funds at institutional pricing rates to lower fees significantly. A financial advisor can assist with understanding any hidden costs or potential options to optimize retirement savings plans.
When rolling over, be sure to select a direct rollover; this means your employer sends money directly into your new retirement account rather than an indirect rollover that results in taxed and possibly early withdrawal penalties if you’re under 59 1/2. Likewise, unemployed workers cannot take penalty-free distributions after more than six months have elapsed since leaving work.
Convenience
Rollover to an IRA allows you to consolidate all your retirement savings into one convenient location – perfect if you switch jobs often – as well as access to investment options not offered through your new employer’s plan.
Rolling your 401(k) to an IRA could mean forgoing certain tax benefits offered by its former employer’s plan, such as potentially lower cost ratios for certain investment options and creditor protection. Furthermore, your contributions may not qualify for the backdoor Roth strategy if your income increases beyond certain thresholds.
Direct rollovers offer the easiest solution; distributions can be sent directly to your IRA provider. Indirect rollovers have only 60 days to deposit funds (gross of any withholding taxes) into an IRA before it will be considered withdrawal and may incur penalties from the IRS.
Taxes
Savers must consider taxes when choosing between keeping their money in a workplace retirement account or rolling it over into an IRA. Fees associated with 401(k) plans tend to be lower due to economies of scale and reduced investment fund fees that result from grouping employees under one plan.
Savers have two rollover options available to them: direct and indirect rollovers. Direct rollovers involve moving funds directly from their 401(k) account into another account, while indirect ones send checks from workplace retirement accounts directly to savers, with taxes taken out automatically. No matter which option is chosen, savers have 60 days from receipt of distribution to make an IRS tax deposit before penalties apply.
Investors should carefully assess their situation and compare fees and features of available options before making a decision. Consulting a financial advisor may assist in making an informed choice which can ultimately reduce costs while increasing investment opportunities.
Investment options
IRAs provide more investment choices than employer-sponsored plans; however, these options may incur fees. For instance, brokerage accounts often charge higher management fees than institutional-class mutual or ETF funds in your 401(k). An IRA may also be managed using computer algorithms which select and rebalance investments according to age, goals, risk tolerance and more.
As long as you remain employed at an organization, it is possible to roll your 401(k). Doing this could be particularly useful if you plan on changing jobs or retiring soon; direct rollover is the ideal method as this ensures the money never reaches your hands and you may avoid income tax and early withdrawal penalties. IRAs offer more investment choices than 401(ks, including individual stocks and bonds as well as mutual funds and exchange-traded funds (ETFs); although these may not match what was available under your old plan.
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