Prior to making the decision to rollover your 401(k), it’s essential that you assess your financial situation and where you anticipate being when retirement rolls around. Direct rollovers avoid paying taxes and penalties which might otherwise have to be paid on transfers between plans.
Indirect rollovers must be completed within 60 days or the IRS may view them as early withdrawals and charge you income tax plus a 10% penalty.
Costs
When leaving an employer, your retirement savings have two options for handling: keep them where they are or roll them over into another plan or an IRA. Be aware of any fees attached to each option that could seriously diminish your savings!
While 401k plans may charge higher fees, IRAs usually have significantly reduced expenses due to economies of scale when pooling investors into one plan and negotiating cheaper investment fees.
As with any investment account, selecting the ideal provider is crucial for building retirement savings faster and at lower costs. Look for companies that charge minimal or no account fees, provide low-cost investments and provide financial planning or robo-advisor support – this could reduce costs significantly while helping your account grow more rapidly.
Taxes
Your retirement savings could become costly if left in an employer plan, depending on its type. Income taxes might need to be paid on all or some of it and penalties could apply if withdrawn prior to age 59 1/2. One way of avoiding these fees and penalties is rolling over your 401(k) into an IRA.
Direct rollover is often the preferred solution when rolling over a 401(k). This involves having your distribution check sent directly to your new IRA provider rather than having any chance for you to access or touch it and potentially incurring income tax or an early withdrawal penalty of 10%.
Search for an IRA provider with competitive fees and offering low-cost investments, as well as one that provides an intuitive online interface for managing balances and tracking performance. Multiple retirement accounts can make keeping track of fees and performance difficult and time consuming, so consider an IRA with low fees that offers simple online interface to track all accounts easily.
Investment options
Rolling over from an employer-sponsored plan to an IRA not only reduces fees but can provide more investment options as well. Some plans limit savers to selecting among just a handful of mutual funds while others encourage participation by encouraging heavy investing in company stock. Furthermore, IRAs allow savers access to low-cost investment management services like robo-advisors.
Though IRAs typically feature lower investment fees than their 401(k) counterparts, larger plans tend to offer economies of scale that could save thousands in investment fees over time.
Rollover IRAs do not provide the same level of protection from creditors and bankruptcy as traditional 401(k) plans do, and any appreciated employer stock held within your former employer’s plan would lose access to its tax-saving benefits (known as net unrealized appreciation – NUA) when rolling it over into an IRA.
Withdrawals
Decisions on whether or not to rollover your 401k funds can have serious ramifications on their tax-free or tax-deferred growth potential and required minimum distributions (RMDs) that must be taken when reaching age 73.
Some workers choose 401(k)s because of the many advantages it offers, including lower fees and a wider investment selection. But in general, rolling over into an individual retirement account (IRA) is usually the better choice.
One key reason is the lower fees typically seen with IRA accounts than with 401(k) accounts, due to employers pooling money into larger retirement plans which allows for economies of scale and lower “institutional” fees for investors.
