There are many things to consider when deciding if you should roll your 401(k) to an IRA. Like anything else when it comes planning for the future, it’s important to look at all of the options, come up with a plan, and see it through. When managed correctly, IRA’s can be an effective way to plan for your retirement, but you need to consider issues like fees and expenses, consolidation, and staying on top of your accounts when looking into a roll over. Here are some simple principles to follow when starting the process.
There are three main options on what to do with your 401(k) assets when terminating employment. You can keep your money in the plan (if you have more than $5,000), you can transfer the assets to a new 401(k) plan or an IRA (trustee-to-trustee transfer), or you can cash out (taxes and penalties may apply). Consider all of your options before you make the decision and if you are not certain, talk to the advisor associated with your company’s plan. You may receive new information that can help you make an informed decision.
For the most part, 401(k) plans are considered accumulation vehicles. They provide you with a simple way to save money for your future, but they are typically not well established enough to help with retirement income. If you are still in the accumulation cycle, consider moving the money to your next employer’s plan (if it is comparable to your current plan or better). If you are in the retirement cycle (or very near retirement), you will want to strategize on how to utilize the assets within an IRA for creation of income.
Fees and expenses can be higher if you move the money to an IRA. However, that may not be a bad thing. Working with an advisor who is helping you more than just providing basic investing advice and can truly assist you with retirement planning may cost more, but may also reap better results in the long run. Ask your advisor (or the company with which you roll your assets) to provide you with a breakdown of their fees and expenses. Make certain they include the costs as a percentage and how it translates to hard dollars.
Having multiple accounts does not diversify your assets. It is the investments within those accounts that provide the diversification. You don’t want all your eggs in one basket, but you want them on the same farm. The account (401k or IRA) is the farm. The baskets are the investments and the eggs are the stocks and bonds within those investments. Whether you consolidate to an IRA or to your next employer, keeping your assets in just a few accounts is much better than having five to 10 accounts.
Whether you are planning on keeping the 401(k) or moving the money to an IRA, make certain you know how to monitor the accounts. You can use the regular statements or you can create an online account, just be sure you are monitoring your account and know how the money is invested and how to make changes if needed. This goes back to the consolidation discussion, after all, how many accounts do you really want to monitor?
Some folks have a grand plan to move their money to an IRA in an effort to save for their future. However, they learn shortly that the IRA allows for much easier access to the money. If you are not in retirement, or before the age of 59 and 1/2, do not take the money out of your IRA. Taxes and penalties may apply to your distributions leaving you with much less than what you actually took out. Stick to your plan!
Once again, we have circled back to the discussion on consolidation. If you have a plan to consolidate your assets and then allocate based on your overall strategy, then go for it. If you are rolling the money to open another IRA (since you already have five), then don’t do it. Consolidate them and keep track of the investments through only one or two accounts (trust me this is a much more manageable approach than having multiple accounts).
Regardless of whether you plan on using an advisor or setting up an IRA with your 401(k) provider, ask for a breakdown of the fees and expenses in writing, and have that information put into real dollars. It is important that you understand how you are being charged and to what extent. There are fees and compensations that are often built into the plan and you should be aware of what fees or commissions are paid.
Often, at the end of your employment with a company, you will be contacted by the provider (or given information on who to contact). This is the opportunity for the provider to keep the assets with them so they continue to make money (through the embedded plan fees) or through advisory services. It’s okay to tell them that you are going to search additional options and discuss alternatives. You can always go back to the provider if you believe it is the best option.
It is important that you prepare for potentially stressful events in life, such as changing employers, moving, having kids, retiring, etc., and then proceed according to your plan once these events occur. You should also take your time when you terminate employment. Explore your options and don’t make hasty decisions. It’s your money, do what you feel is best for you in the long run.
Whether you feel like a 401(k) plan or IRA is right for you, it’s important that you have a firm understanding of what both options bring to the table. Take the time to consider every angle and stay on top of your plan. Again, it’s your money and you need to make sure you’re putting yourself in a position to be comfortable down the road.
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