IRA Rollovers: Yes, Rolling Over Your 401(k) Into An IRA Is Smart!

Changing careers? Deciding what to do with retirement funds is going to be a primary concern. While there are a number of options available, many choose to roll these funds over into an Individual Retirement Account.

There are a number of good reasons for this.

What Exactly is a Rollover IRA?

IRA Rollovers can be deposited into an IRA from another retirement fund, for instance: a 401(k). Those who don’t already have an IRA can open one for the express purpose of rolling over funds from a previous employer’s retirement plan. Those who already have an IRA can simply roll over the money into the existing IRA.

The Benefits of an IRA Rollover

Many folks are content to let their 401(k) plans accrue money over time, and there’s nothing wrong with that option. Why would you fix something that isn’t broke? Well in this instance, you would not be fixing something that is broken so much as replacing it with something better.

What do we mean?

Those who have just switched jobs have a short list of options concerning their retirement funds. These include:

  • Cashing out the funds immediately
  • Leaving the money alone
  • Rolling the money over into the new 401k
  • Rolling the money over into an IRA

Cashing the funds out immediately is not advisable. While leaving the money in the original 401(k) or rolling it over into the new one aren’t bad options, there are a number of reasons why an IRA rollover is the best option on the list.

Rollovers Can Preserve Tax-Favored Status

Those who choose to cash out their accounts early are not only subject to a 10% early withdrawal penalty if they are under the age of 59 ½ but will also need to pay income tax on the balance.

By contrast, rollovers can preserve tax-favored status so long as they’re transferred from one trustee to another. In other words, the IRA will continue to grow tax-deferred until a retiree begins collecting on their investment.

IRA Rollovers Can Increase Investment Options

Some folks choose to leave the funds in their old plan alone or roll the funds over into a new employer-offered plan. There’s nothing wrong with this per se, but rolling the money over into an IRA can increase the number of options that are available to you. For instance, IRAs typically offer a broader range of investments. 401(k) plans, on the other hand, may be limited to a handful of mutual funds.

This advantage will contribute to a better investment strategy and can prove more lucrative in the long run.

IRAs Have Lower Fees

Generally speaking, employer-sponsored 401(k) plans typically have higher administrative fees than IRAs.

An IRA Centralizes Control of Your Retirement Monies

There might some good reasons to keep your old 401(k) open, particularly if you’re satisfied with the returns. On the other hand, it’s much more convenient to have one centralized location from which to manage all of your retirement funds. IRAs are easy to figure out and significantly reduce the complexity of managing separate accounts.
From one centralized location you can access:

  • Your balance
  • Your recent performance
  • Your investment selections

Brokers Will Compete For Your Business

Brokerage firms are more than willing to offer incentives to bring your business to them. In some instances, this could even mean free cash. In other instances, you may be entitled to free trades. It’s certainly something to look into as you figure out how you want to invest your retirement money.

401(k) Plans are Subject to Rules an Individual Company Establishes

Every company has a great deal of wiggle room when it comes to setting up a 401(k) plan for their employees. IRAs, on the other hand, are subject to a centralized set of rules established by the IRS.

This is better for two reasons:

  • Different 401(k) plans will have different rules, meaning you need to familiarize yourself with the fine print.
  • IRA brokers are all bound by the same set of rules meaning that there is more transparency.

The Rollover Itself is Free

While there are other costs to consider, rolling over a 401(k) into an IRA is free. There will be transaction costs for individual investments and other costs to bear in mind, but setting up and rolling over the money is a relatively pain-free process.

The Bottom Line

The advantages of rolling over your 401(k) into an IRA far exceed the risks. It makes sense not because the other options are bad, but simply because IRAs are better for some. With more investment options to choose from, lower administrative costs associated with the account, a simple centralized location from which to access your retirement investments, and more transparency regarding how the fund operates, IRAs make the most sense  for your retirement plan.

Last Updated: 
March 8, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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