Contributing to an employer-sponsored retirement plan (401K or its cousin, 403B plans), has many advantages and can help you achieve the life you want at retirement; it is important to know how your plan works and what it allows for. One of the provisions available on many retirement plans is to allow the participant to rollover (all the money they have saved within the plan) into an IRA while they continue to work for that employer; they can keep contributing to their plan and get the employer match (if available). The other instance in which it is allowed for a participant to rollover the money in the plan into an IRA is at separation from that employer. Below are some of the benefits of rolling over the money from your retirement plan into an IRA:
- More Investment Choices: The investments on your 401K are limited only to the menu of investments or choices made available to you by your employer. By rolling over the money into an IRA, you can have access to unlimited investment choices, such as mutual funds, individual stocks, bonds, exchange-traded funds (ETFs), to name a few. Most employer-sponsored retirement plans do not allow the use of risk management, such as options, but IRAs do. It is even possible to hold income-producing real estate in your IRA. This allows you to have more control on the way you invest your money and design a trading strategy that is in line with your overall risk tolerance and goals in order to manage risk more efficiently.
- Lower Fees and Cost: Many people are not aware that there are costs associated to having your money in an employer-sponsored retirement plan; the funds offered by your retirement plan at work may be more expensive than the average for their asset class. Additionally, there is the overall annual fee the plan administrator charges. Investors should be careful about transaction costs associated with buying certain investments and the expense ratios, 12b-1 fees, or loads associated with mutual funds. All of these can easily exceed 1% of total assets per year. Rolling over into an IRA could save you a lot in management fees, administrative fees, and fund expense ratios, all those little costs can eat into investment returns over time. However, make sure you are aware of all the costs associated with the rollover and investment choices on your IRA before rolling over your money.
- Fewer Rules: There are no standard rules that apply for all employer-sponsored retirement plans since each company has a lot of latitude in how they set up the plan, which makes it not easy for participants to understand how it works. However, IRA regulations are standardized by the IRS- an IRA with one broker follows most of the same rules as with any other broker.
- Continued Tax Deferral: One big advantage of an IRA rollover is the continuation of the tax-deferred treatment you had at your workplace retirement account. No tax is owed on a properly executed rollover, although it is a reportable transaction to the IRS.
- The Roth Option: An IRA rollover opens up the possibility of a Roth There are Roth 401(k)s, but they remain rare. With Roth IRAs, you pay taxes on your contributions when you make them, but then there is no tax due when you withdraw them (the opposite of a traditional IRA). Additionally, you don’t have to take RMDs at age 70½, or indeed, ever, from a Roth IRA. If you believe you will be in a higher tax bracket or tax rates will be generally higher when you start needing your IRA money, a Roth might be in your best interest. If you’re under age 59½, it’s also a lot easier to withdraw funds from a Roth IRA than from a traditional one. There no early-withdrawal penalties for contributions, in most cases, though there are for any earnings. Your 401(k) plan administrator may only permit rollovers to a traditional IRA. If so, you’ll have to do that and then convert it to a Roth.
- Estate Planning Advantages: Upon your death, there’s a good chance that your 401(k) will be paid in one lump sum to your beneficiaries, which could cause income and inheritance tax liabilities. This 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 IRAshave their regulations too, but IRAs offer more payout options. Again, it comes down to control.
- Better Communication: If you leave your current employer and keep your account with them, you might not receive communication regarding the plan (such news are often distributed through company e-mail) or get in touch with the advisor or administrator. Having ready access to information is important in the unlikely event something goes wrong at your old workplace.
As you can see, there are many advantages to rolling over money from an employer-sponsored plan into an IRA; however, a lot of it depends on the specifics of the 401(k) or 403 (B) plan, the investment options, fees, loan provisions, etc. and how these terms and features compare to those offered in an IRA you could establish with a brokerage or bank.
If you are still contributing to your retirement plan at work after the rollover, you could have the best of both worlds. After you’ve done your rollover, you can contribute to both your 401(k) or 403 (B) plan and an IRA (Roth versions, too) as long as you don’t go over your annual contribution limit; however, make sure to check with your CPA regarding the deductibility of those contributions.