6 Reasons You Should (Absolutely) Rollover Your 401k to an IRA

(if you’d rather watch the video, click here).

When you change jobs, the best option is (typically) to roll your old 401k into an IRA, either a traditional IRA, a Roth IRA, or a combination of both, depending on how your 401k was structured.

If you don’t do a rollover correctly, you could subject yourself to taxes and penalties (yikes!), so make sure you enlist the help of a professional to get a rollover taken care of successfully.

A lot of people think you can just leave your 401k with your old employer and everything will be fine. That is an option, but there are a lot of reasons not to. Let’s go over those now:

1. Options, options, options (more investment options)

By rolling your 401k into an IRA, you give yourself an almost infinite array of investment options. 401k’s are usually limited to whatever investment options are offered by the plan, but with an IRA, you will have access to almost every investment option available on the market!

2. You won’t be left in the dark (better communication with an IRA)

When you leave a 401k with your old employer, there’s a chance that you might be treated like a second-class citizen, since you no longer work with that company. It might not be intentional, but the HR department is likely to prioritize current employees and communicate via company email, leaving past employees somewhat in the dark about changes and updates to the 401k plan. By rolling your 401k over to an IRA, you now have a dedicated team watching your account, sharing updates and new information, and having a vested interest in providing good customer to you, to keep your account… A win-win all around.

3. Lower Fees & Costs (the biggest benefit in my opinion)

Rolling your 401k into an IRA can help you reduce management and administrative fees which can eat away at your investment returns over time. On top of that, a lot of 401k’s have an overall annual fee that is charged by the financial institution managing the plan. 401k’s can even be structured as a variable annuity, which are notorious fee-generation vehicles for financial professionals (sometimes even 3–5% per year!)

IRA’s certainly won’t be free of fees, but you have the flexibility to choose, and can always elect to own low-cost index funds which can keep your investment costs incredibly low. IRA’s also give you complete flexibility of your account, which can help you avoid expensive, managed accounts that are often pitched by investment brokers (not to mention completely unneccessary for a successful investment strategy).

4. Options for a Roth Conversion

Roth IRA’s are funded with after-tax money, meaning you pay taxes today when you make contributions, but when you take money out, none of it is taxable! It’s also not considered “provisional income”, which is the determining factor for how your social security income will be taxed in retirement.

If you can keep your provisional income low enough, you can avoid paying any taxes your social security income in retirement like I talked about in this video, AND you can retire completely tax free! That’s everybody’s goal, right?!

Rolling your 401k to an IRA gives you a great opportunity to analyze if and when a Roth Conversion would make the most sense for you, which is part of a strategy that can ensure that you retire completely tax-free. I talk about how to do this, but the optimal strategy is typically to keep about $350,000 in your traditional IRA (that can be offset by your standard deduction in retirement), then to begin repositioning your other retirement assets into a retirement vehicle that is NOT taxable in retirement!

5. Less Rules (and much clearer ones)

401k plans can be complex, and not easy to understand because employers have a lot of flexibility in how they can be structured. In contrast, IRA rules are much more standardized by the IRS and do not vary from institution to institution.

Also, there are more limitations and requirements with a 401k plan, for example, the IRS requires a 20% federal tax to be withheld from any distribution from a 401k, but that requirement does not exist in an IRA. So whether it’s smart to withhold the taxes or not, the IRA gives you more flexibility to decide what is best for you!

6. Estate Planning Advantages

If you die with an old 401k, it will likely be paid as a lump sum to your beneficiaries, which could trigger an inheritance and/or income tax headache (we always try to avoid administrative nightmares, and unneccessary taxes). On the other hand, IRA’s offer more options in terms of payouts for your beneficiaries, which again, can give not only you, but your loved ones more flexibility by simply rolling over an old 401k into an IRA.

There are a lot of different ways to rollover a 401k and a lot of smart strategies that should be considered in doing so, but in most cases, it does make sense to roll that old 401k over to an IRA. If you wondering exactly how to go about doing that, check out this short instagram video by Amanda Ryba (which does a great job of simplifying the process).