When you leave a job where you hold a 401(k) account, you have a few options available to you. It may be the case that you need to decide whether to leave the assets at your former company (assuming that’s an option) or move them into a rollover IRA (individual retirement account). We believe investors may want to consider the following five reasons for moving their retirement assets into a new IRA account.
1. Enhanced Investment Choices
When you leave a job, you can open a rollover IRA, which is an account that allows for the transfer of assets from a former employer-sponsored retirement account to a traditional IRA. The usual purpose of a rollover IRA is to maintain the tax-deferred status of those assets.
When companies set up 401(k) plans, they often limit the investment options available to participants. Rollover IRAs, in contrast, generally provide a wider investment menu consisting not only of mutual funds but also exchange-traded funds and individual stocks and bonds. This wider array of options can allow you to control and customize your portfolio with the goal of aligning your investments with your long-term financial needs, risk profile, and retirement goals.
2. Potentially Lower Fees
Participants in company-sponsored 401(k) plans often pay management and administrative fees associated with the plan that can ultimately reduce the overall return they achieve on their investments. In addition, the investment options offered by the plan may have higher fees than those available through the investment menu offered with a rollover IRA. It’s important to carefully research all fees associated with rolling over your 401(k) to an IRA as they have the potential to be higher than those associated with keeping your 401(k) with your former employer.
3. Easier to Manage Your Investments
Maintaining a diversified portfolio across asset classes can be a smart way to help meet your long-term risk/return objectives. However, having one, or multiple, 401(k) accounts with different employers can make it challenging to clearly understand how your asset allocation looks across all your investment accounts. In addition, some 401(k) plans limit the number of transactions you can make in your account during a year. In contrast, consolidating your retirement accounts in one place can make it easier to monitor and adjust your asset allocation over time, as you near retirement and your financial needs change.
4. Benefits for Your Estate
It’s typically the case that, upon the death of the owner of a 401(k) account, the assets are paid out to a beneficiary in a single lump sum which can create undesired inheritance and income tax challenges. However, an IRA may offer several payout options to provide flexibility and potentially mitigate these challenges for the beneficiary. In addition, with an IRA, the beneficiary may also be a trust, which can be beneficial for estate and tax-planning strategies.
5. Ability to Use a Roth IRA
When you roll your retirement assets into a rollover IRA, you gain the ability to convert those assets to a Roth IRA. With a Roth, you pay taxes on the money you contribute but you avoid paying taxes when you withdraw the money, unlike a traditional IRA. In addition, you are not required to take required minimum distributions (RMDs). Importantly, there are several tax mitigation strategies for when to convert your rollover IRA to a Roth IRA that should be discussed with your tax advisor before any action is taken.
At CI Segall Bryant & Hamill Private Wealth, we have a long history of helping our clients with their retirement planning needs, including the decision on whether to keep 401(k) assets at a former company. We welcome the opportunity to work with you to help you make the best decision for your individual needs. Please reach out to us at firstname.lastname@example.org or call us at (800) 836-4265.
Last updated March 2023. This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
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