The Logic of 401k IRA Rollovers
Bob Richards--Marketing and Financial Services
It may seem like you’re taking control of your future simply by maintaining a qualified retirement plan offered by a former employer, like a 401(k), 403(b), or govt 457 plan. But are you? A few retirees take a passive approach to their retirement assets, preserving accounts with past employers for the sake of simplicity. But this simplicity may have a big cost.
If you have any retirement account with just one employer, you may have suitable investment options and may pay reasonable fees, so it might be a good idea to leave your retirement account with your ex-employer. But if you have multiple retirement accounts with different former companies or if your investment alternatives are limited ( as is typical with most 401k plans), you might want to contemplate combining your assets in to one traditional IRA (you don’t need numerous IRA rollovers). Here’s why.
IRA rollovers could provide you with enhanced flexibility as compared to your current plan. For example, some qualified retirement plans (i.e. the types of plans offered at businesses) may present limited investment options, such as 4 or 5 fund choices plus the employer’s stock. Lack of choices could put your retirement savings at risk, particularly if your own savings are concentrated inside of a few funds or even in one company’s stock. Or, the limited choices could limit your return. In contrast, self-directed IRA rollovers could offer unlimited investment options, allowing you to allocate your retirement cash more appropriately according to your own investment goals.
It might be hard to manage investments involving multiple retirement plans should you have accounts at several ex-employer retirement plans. When you have more than one retirement account, bringing together your retirement assets in a single IRA rollover will make it easier to manage and monitor your investments. In addition, keeping retirement funds in one place simplifies beneficiary options along with estate planning. For example, if leaving you’re retirement finds to your grandchildren, you only need to change one piece of paper if you have a new grandchild.
The common funds available through your existing plans may have high internal 401k expenses. A small savings of just half a percentage point in account expenses annually can mean thousands of additional dollars in your account over many years. With IRA rollovers, you’ve got control over the investments you select and the expense ratios you will tolerate. It’s not uncommon that with all costs totaled, an account with an employer plan could have internal costs of 2 % annually and on your own, an indexed fund or ETF may have total costs of just .2%. A 90% savings!
The only complications with IRA rollovers is if your ignore the process articulated by your ex-employer for transferring the funds to your own retirement account. Each employer has their own process and paperwork. So just follow it t the letter. Allow the employer to make a direct transfer to your new custodian, what is called a IRA direct rollover. Do not consider moving it yourself as you will be faced with needless income tax withholding and complications that are so onerous, we will skip them in this post.