Our last post discussed the importance of beneficiary designations for your retirement accounts, and keeping them up to date.
This time, we address a question we hear a lot – when you retire, should you roll your 401(k) into an IRA?
There are pros and cons to such a rollover; these should be weighed in view of your individual circumstances and needs.
- Wider variety of investment options – while it isn’t always the case, usually an IRA offers more choices than an employer-qualified plan to allocate your assets.
- Fixed income choices – 401(k) plans generally have limited bond investments; it may well be that, once you retire, you will want a greater portion of your assets invested in fixed income funds. An IRA’s fixed income investment options are only limited by your IRA custodian and usually are far more diversified, and you may find better fits for your needs.
- Consolidation of assets – research shows that baby boomers may change jobs as many as 12 times over their careers. It’s often a good plan to consolidate your retirement assets into a single account – and if you haven’t done this before retirement, this might be exactly the time to do it. It is a lot easier to keep track of a single account which provides a total picture of your retirement funds than it is to monitor a dozen, or even three or four, accounts.
- Control over withdrawals – many 401(k) plans allow only full-account withdrawals upon the a participant’s termination with the plan. IRAs provide the option of regularly scheduled or at-will withdrawals, without penalty once you are over age 59½.
- Different age-eligibility for penalty-free withdrawals – if you are retiring after reaching age 55, but before you are 59½, your 401(k) may allow you to withdraw funds without incurring the 10% early-withdrawal tax penalty under IRS code section 72(t) In addition, if you had planned to retire at age 70, but find yourself unready at that point to give up your occupation, you can continue to contribute to your 401(k) – unless you own 5% or more of your employing company – until you retire, and you need not take required minimum distributions (RMDs) while you are still working. An IRA has no such flexibility regarding early withdrawals and RMD age requirements.
- Legal protection of assets – if you are facing the prospect of a lawsuit, ERISA rules protect assets in an employer-sponsored retirement plan from creditors. IRA assets have some protection, but not as much as a 401(k) plan, and the level of protection can vary by state.
Another factor to consider is the fees attendant on your existing 401(k) and any IRA you contemplate rolling that account into. While IRAs will often have lower costs, this is not always the case, particularly if your 401(k) plan is with a larger employing company. It pays (literally, in savings) to look closely and carefully at the costs of all plans.
Before you make any decision – and before retiring – please consult your CPA/financial planner. S/he will listen to you, understand your needs and goals, review your account(s) – both existing and contemplated – and guide you toward the best choice for you. Because the best decision for one person isn’t always in another’s best interest. Each situation is unique, and your financial planner knows that.
If you are wondering whether you should roll your employer-sponsored retirement plan into an individual retirement account, please reach out to us – we are at your service.
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Until next time –