Knowing when to make amendments to your existing retirement plan can be challenging. Do you move your money or keep it where it is? Below are reasons to consider a rollover, as well as things to think about before implementing one.
When life throws changes your way, like getting a new job, you generally have four options for your 401(k) plan. One option is doing a 401(k) rollover to an individual retirement account (IRA). The other options include cashing it out—and paying taxes and a withdrawal penalty, leaving it where it is. That’s if your ex-employer allows it, otherwise you can transfer it into your new employer’s 401(k) plan.
For most people, rolling over a 401(k) or 403(b) is the best choice. Here’s a look at 3 reasons to consider rollovers.
More Investment Choices
Your 401(k) has limited investment choices. You will likely have a choice of mutual funds from one particular provider. However, with an IRA, you can invest just about anywhere. In addition, you’re likely to have more types of investments to choose from. Here are a couple other options you would have that are included with an IRA:
- Individual stocks
- Bonds
- Exchange traded funds
You can also buy and sell holdings any time you wish. Most 401(k) plans limit the number of times per year that you can rebalance your portfolio, or restrict you to certain times of the year.
Lower Fees and Costs
Rolling your money over into an IRA will often help reduce the management and administrative fees you’ve been paying. This can eat into your investment returns over time. The funds offered by a 401(k) plan may be more expensive than the norm for their asset class. With that, there is an overall annual fee that most financial institutions managing the plan charges.
The bigger 401(k) plans with millions to invest have access to institutional-class funds that charge lower fees than their retail counterparts. It’s important to note that your IRA won’t be free of fees either. You will have more choices and more control over how you’ll invest, where you’ll invest, and what you’ll pay.
Estate Planning Advantages
Having an estate planning advantage is a great position to be in. Upon your death, there’s a good chance that your 401(k) will be paid in one lump sum to your beneficiary, which could cause income and inheritance tax headaches.
Rules vary depending on the particular plan, but most companies prefer to distribute the cash quickly so they don’t have to maintain the account of an employee who is no longer there. Inheriting an IRA has tax implications too, but IRAs offer more payout options.
Last Thoughts
Rolling over your 401(k) into an IRA gives you the added benefit of a greater number of investment options. You also cannot make contributions to a 401(k) after you leave the company, but you can if you roll it over into an IRA. If you simply cash out your 401(k) account, you’ll owe income tax on the money.
Whichever option you choose, the retirement income advisors at Johnson Wealth and Income Management can provide you guidance every step of the way. We are here to help you learn new ways to improve your tax strategies.
For more information on our financial and Fiduciary services, contact us here today.
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