Top Five Reasons to Roll Over Your 401(K) to an IRA

by | Jun 2, 2022 | Uncategorized

Whenever you change jobs, you have several options to consider with your 401(k). You can leave it where it is, transfer it into your new employer’s 401(k) plan (if one exists), or roll it over into an individual retirement account (IRA). For most people, rolling over a 401(k) into an IRA is the best choice. Below are several reasons why.

1. More Investment Choices

Your 401(k) is limited to a few planets in the investment universe. In all likelihood, you have the choice of a few mutual funds—mostly equity funds and a bond fund or two, and that’s it. However, with an IRA, most types of investments are available to you – not only mutual funds and ETFs, but also private investments and custom structured notes, plus many other options.

You can also buy and sell your holdings anytime you want. Some 401(k) plans limit the number of times per year you can rebalance your portfolio.

2. Better Communication & Planning

If you leave your account with your former employer, you might be treated as a second-class citizen. It might be harder to receive communications regarding your plan or to get in touch with an administrator.

If you roll your 401(k) to an IRA, an IRA advisor can provide information to you promptly and better incorporate the account into your goals and overall financial plan.

3. Fewer Rules

Understanding your 401(k) is no easy task since each company has considerable leeway regarding how the plan is set. In contrast, IRA regulations are standardized by the IRS.

One often-overlooked difference between a 401(k) and an IRA is the IRS rules regarding taxes on distributions. The IRS requires 20% of distributions from a 401(k) to be withheld for federal taxes. When you take a distribution from an IRA, you can elect to have no tax withheld. While this option is available to you for IRA distributions, it’s probably wise to have some tax withheld rather than potentially winding up with a big tax bill at the end of the year and possibly interest and penalties for underpayment. An advisor can help you determine an amount to withhold.

4. Estate Planning Advantages

Upon your death, there’s a good chance that your 401(k) will be paid in one lump sum to your beneficiary, which could cause income and inheritance tax headaches. It varies depending on the particular plan, but most companies prefer to distribute the cash fast, so they don’t have to maintain the account of an employee who is no longer there. Inheriting IRAs has its regulations too, but IRAs offer more payout options.

If you roll your 401(k) to an advisor, the person can help to ensure beneficiaries are set up correctly with both primary and contingent beneficiaries in place. If kept under your previous employer’s 401(k) plan, your advisor would have no visibility to beneficiaries. If beneficiaries are not set up, you can come into escheatment issues. States are becoming more aggressive in going after unclaimed property, and IRAs and 401Ks are no longer off-limits.

Again, it comes down to control and flexibility.

5. Required Minimum Distributions

At age 72, you are required to begin taking Required Minimum Distributions (RMDs) from pre-tax IRAs and 401Ks. Custodians of former employer 401Ks do not actively alert you to take RMDs, and if you miss an RMD, the penalty is 50% of what you were required to distribute. Furthermore, the more previous employer 401Ks you have, the harder it is to calculate the correct RMD to take each year.

On the other hand, if you roll 401Ks to an IRA with an advisor, they will work with you directly to take the correct required minimum distribution every year.

Ready to start planning for a brighter future? Call today at (408) 840-4030, or contact our team online.