Should you rollover your 401k?

Many Baby Boomers in or near retirement have a 401k, or something similar, like a 403b, 457, or profit-sharing plan. You will typically keep that money in the 401k until it is either time to withdraw money or because you want to have other options. There are some things you need to know before rolling over your 401k to an IRA. It may not always be the best decision, so here are the pros and cons to rolling your 401k to an IRA.

Pro: More options available

One of the major downsides to a 401k is that you are limited to the investment options. You are either in stocks, bonds, or the money market or some combination of all three. When you rollover your 401k to an IRA, you now have more options available. You can purchase individual stocks, pick investment funds from other organizations, have a more active managed account, or even buy an annuity if your plan dictates to have one. These are all advantages that your current 401k won’t have.

Cons: Fees are higher outside of the 401k

Typically, when you go outside of your 401k, you are going to leave the luxury of low fees. Fees are necessarily a bad thing, however, it doesn’t help you to leave your 401k to go into an IRA with similar funds and pay more in fees. Make sure that you are getting your money worth when you make the change.

Pro: Converting your money to a Roth

Leaving your money in a 401k will allow you to grow your money tax-deferred, however, you will be forced to take out the money when you turn age 70 ½ due to required minimum distributions. By converting your money to a Roth IRA you no longer have required minimum distributions and your money is now growing tax-free and when you take it out it is tax-free. The downfall is you have to pay the taxes when you convert it. Make sure you meet with a CPA or tax advisor before making this move.

Cons: Rule of age 55

If you retire from your company at the age of 55 or after, you can take money from your employer-sponsored retirement accounts without the age 59 ½ IRS ten percent penalty. You may only do this if your money is still in your retirement accounts. Once you roll your money to an IRA, you no longer have this advantage available to you and you will have the ten percent penalty if you take money out before age 59 ½.

Pro: Target Date funds may provide a false sense of security

A lot of employer-sponsored retirement accounts are moving toward the retirement date funds because they are simple and it can be hard for you to pick a well-diversified portfolio with the options you have. Target date funds seem like they are actively managed, but in reality, they are funds that balance between equities and bonds. The shorter time frame to retirement, the more bonds it will hold, and fewer equities. It is important for you to know that these funds only balance, they are not actively managed enough take away the risk. In 2008, the 2010 target date funds lost 20%-35% which is significant considering that based on the date you are saying you are going to retire in 2 years.

Con/Pro: Are you getting enough help

Some employer-sponsored plans like 401ks have a financial advisor to help you already with making fund choices. The downfall is they don’t necessarily put a comprehensive retirement plan together for you and they do not deal with all aspects when it comes to retirement planning. Making sure you work with a retirement planner is key to making sure you have the best chance of success in retirement.

After you have weighed the pros and cons of both options, you can feel better about rolling over your 401k or keep it where it is at. Everyone’s situation is different, so there is not a right answer, however, it could also be a combination of rolling some of the assets and keeping some in the 401k as well. What it really comes down to is your own retirement plan. The plan will help dictate where things should go.

Video Transcription

Hi, Vince Oldre, certified financial planner, and I want to talk to you about a question that a lot of people have, and that is: should you roll over your 401(k) to an IRA or to another institution? And the answer is not always a yes and it’s not always a no. You really do have to figure out what makes sense for your overall retirement plan. But I’ll give you some pros and I’ll give you some cons to moving a 401(k) to an IRA. One of those pros is that you will have more options outside of your 401(k). The options that you have are pretty limiting when it comes to your 401(k). Some will only have 10 options, some will have 30, some will even have 300 different options when it comes to what you have available in your 401(k). When you go outside of your 401(k), you’re going to have well over thousands of different options, but also you can create your retirement plan around those options, whereas in a 401(k), it’s harder to create your retirement plan to coordinate with your retirement plan, because what they’re doing with the 401(k) plan is they’re covering the masses. They’re not making sure it’s an individualized plan just for you. One of the cons to moving a 401(k) to an IRA is that the fees could be higher than you would have at your 401(k). Sometimes they’re lower, but more often than not they’re higher. And that’s just something that you have to be aware of but also, what I always tell people is making sure that you’re getting everything out of those extra fees.  Meaning, make sure you’re getting the right advice and make sure that whatever you’re using is coordinating with your plan. It doesn’t make sense to move from one mutual fund that’s pretty much the same mutual fund, to another mutual fund where you’re going to be paying the same amount of fees in the same type of plan, but also now you’re going to pay more fees outside of the 401(k). Whereas the 401(k) mutual funds are going to be typically cheaper. One of the pros to moving money from a 401(k) to an IRA is you can also convert that money to a Roth IRA. And what we’re doing here is we’re trying to create more tax efficient money down the road with Roth IRAs, which means that the Roth money is going to grow tax-free and when I take it out, it will be tax-free. One of the cons to moving money from a 401(k) to an IRA is that I’m going to give up the Rule of 55. If you have a retirement account, you cannot take assets out of that account before 59 and a half without the 10% IRA penalty. However, if you retire from that company after the age of 55, or 55 or after, you can actually take distributions as long as it’s still in that 401(k) that you were previously employed by, you can distributions out of there without having the 10% penalty. Before you go and move all that money out of your 401(k) to an IRA, it might make sense to even leave some of that money in that 401(k) if you were going to retire between 55 and 59 and a half.  One of the pros to moving the money form your 401(k) to an IRA is that you will get out of those target date funds. The target date funds give us a false sense of security that we’re not going to be as risky as what we really are. The target date funds are supposed to change based on how close you are to retirement and what they do is they’ll weigh it a little bit more towards bonds instead of equities the closer you get to retirement, because bonds are supposed to be less volatile than the stocks. But what we’ve found through 2008 is that a lot of those target date funds, even the 2010 target date funds, actually dropped well over 20, maybe 25, even 30%. Which means you’re two years away from retirement and you lost 30% of your portfolio, which can be significant. The downfall to these 401(k)’s is we might actually get a false sense of security if we’re in those target date funds, and a lot of times what we see is this pro and con thing is that you might not be getting advice. And that advice might outweigh the difference after all. The advice will help you coordinate your retirement plan with what types of investments you should use within that retirement plan. But it also will help you get out of those things that you might be more risky in. And if you’re overwhelmed by your own 401(k) or 403(b) or other savings plan, and all you do is just put in the target date fund thinking you’re going to be safer than you really are, that could actually hurt you when we have a major market correction.  Those are some different pros and different cons when it comes to moving your 401(k). What I always recommend is make sure you meet with a fiduciary. Now that all are all fiduciaries anyway, you want to make sure that you meet with a financial advisor that will give you the best advice when it comes to moving it, whether you’re still working or not working. Whether you’re 55 through 59 and a half. Whether you’re going to have more fees or less fees, of if you’re going to get that full advice that you should get when you’re actually paying a fee for some of your investments. I hope you’re able to figure out whether or not you should move your 401(k) or not.  If you do have any questions, please feel free to reach out to me. I’m more than happy to answer your questions. If you do want to come to one of our events, make sure you go to our events page and we’ll make sure to see you at our next event. Until then, I thank you for watching and I look forward to speaking to you next time.

 

Should you rollover your 401k?
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