Three Reasons to Roll Your 401(k) Money to an IRA
Three Reasons to Roll Your 401(k) Money to an IRA
This market volatility can be pretty uncomfortable, especially if retirement is in the very near future. It's even harder to handle opening those monthly or quarterly account statements when there is no one to turn to for advice.The government has temporarily ruled that employees cannot get advice from advisors who represent the custodians of their 401(k) plans. There is a concern that employees will not be getting unbiased advice.Employees have to look elsewhere, but most employers have not provided independent financial education for their employees. As a result, many employees are not getting advice on how to effectively manage their 401(k) accounts.In preparing to retire, many employees are unclear about whether they should leave their 401(k) account balance in the employer plan or roll it into an IRA outside of the plan. Here are three reasons to consider moving the funds into an IRA.401(k) plans are limited in scopeMost 401(k) plans are limited to a select group of investment options. If the plan is held strictly with one investment firm, such as American Funds, it is possible that the breadth and variety of options is limited even further.Ideally, there are advisors who are carefully monitoring the investment choices to ensure that the quality of the investments is maintained. Unfortunately, that is not usually the case. Plan trustees are not always kept up to date on changes that should be made within the 401(k) plan, and employee access to advisors has been minimal at best.During retirement years, it is absolutely essential that the investments in all retirement accounts are being monitored frequently. This is not the time to have an account maintained in an environment that restricts access to quality advice.Choosing to roll assets into an IRA allows account holders the opportunity to select an investment advisor who understands the retirement goals and is able to give advice that is consistent with those goals.Access to funds in 401(k) plans is restrictiveIf an emergency arises while an employee still employed, it is usually possible to take a loan against the 401(k) balance. The loan is then paid back, with interest, into the account through payroll deduction.Once an employee terminates employment, the ability to borrow against the account balance is no longer available. The employee would have to request a distribution from the plan in order to access the funds.With so much uncertainty right now, IRAs can provide easier access to funds when a need arises.Inability to do a Roth IRA conversionSome retirees are considering Roth IRA conversions so that they can have their accounts grow on a tax-free basis. In the year of the conversion, there will be a tax payment required on the amount converted, but there will be no further taxes on the gains from that account.Most 401(k) plans do not allow for a Roth option. If a retiree wants to convert all or a portion of the account to a Roth IRA, it has to be done outside of the 401(k) plan.It is important to remember that, in making the transfer, funds should go directly from the 401(k) plan to the new account. If the check is made out directly to the account holder, there will be a 20% mandatory tax withholding. Account owners under the age of 59 will also incur a 10% early withdrawal penalty. Both of these withholdings are avoided in a trustee-to-trustee transfer.
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