Rolling over a 401k and IRA plans are both designed to benefit you in your old age. However, one may prove friendlier and more profitable than the other, depending on the circumstances. In most cases, rolling over a 401(k) over to an IRA is considered a lucrative move. This article will explain why.
1. 401(k) vs. IRA – What is the Difference?
A 401(k) plan is a retirement account sponsored by your employer. You contribute to the account by giving your employer permission to automatically withhold a portion of your salary. The employer can also match your contributions.
An individual retirement account (IRA), on the other hand, is a personally-sponsored retirement account. You are responsible for funding the account, and experts recommend contributing the maximum amount.
Benefits of Rolling Over a 401k to an IRA
As mentioned, rolling over a 401k plan to an IRA plan proves lucrative more often than not. Following is an overview of five of the most lucrative benefits you stand to reap from rolling over a 401k:
The annual fees and costs of managing your 401(k) can easily exceed 1% of the total value of your assets! The figure increases over time, which means that your final payout decreases over time as well.
It costs more to maintain a 401(k) plan compared to an IRA. Associated fees and costs include expense rations and management and administration fees. What’s more, there is a substantial annual administrator’s charge.
However, there is an exception to this disadvantage: a massive 401(k). This is because large 401(k) plans typically invest in institutional-class funds that charge less and give back more than asset-class investments; unfortunately, it is beyond most people’s reach.
2.More Cash Incentives
Besides saving thousands in associated fees and costs, you also stand to make thousands just by deciding to rollover your current 401(k) plan to an IRA plan. As mentioned, IRA plans are individually funded and operated by commercial banking institutions. These institutions often offer lucrative cash bonuses as an incentive to attract more people.
Besides free cash, you can also take advantage of other incentives such as free trades and discounted investment management. However, it is prudent to double-check your (and your IRA broker of choice) offers as some may come with strings attached.
Every company has a distinct 401(k) plan as the law provides a lot of leeway on how individual sponsors can run and manage the plans. This has contributed to a bureaucratic headache whereby there are often more rules than you care to learn, let alone follow. This is not the case with an IRA plan as these are individually managed accounts that are regulated by the Internal Revenue Service.
Speaking of the IRS, it is also worth noting that the agency has stricter taxation rules for a 401(k) plan compared to an IRA plan. With the former, 20% of your contributions will be deducted automatically to play towards the federal tax. With an IRA plan, however, you can choose how much to have deducted for taxation.
4.More Investment Options
While it is prudent to save towards retirement, it is more prudent to put your savings to work and see them grow. Unfortunately, a 401(k) plan has limited investment options – options are usually limited to mutual funds. With an IRA plan, however, you can invest your savings wherever you see fit, including in ETFs, bonds, and individual stocks. You can also sell your holdings at will or buy more.
5.Easier Estate Planning
Ideally, you are contributing to your retirement fund so that your golden years can be comfortable. But what happens if you die before then? Your next of kin will be the beneficiaries of your hard work, but the blessing may turn into a curse depending on your retirement plan.
Upon your death, your employer will pay out all your 401(k) funds to your next of kin in one lump sum. This can potentially raise a lot of complications, including issues with inheritance and income tax. It may also cause squabbles in the family.
Payout options are more flexible when working with an IRA retirement plan. You can leave directions on how the payouts should be made (who should get how much, how many installments should be made, and other stipulations). This will help towards a smooth transition of the money and tied assets.
When Rolling Over a 401k Isn’t Worth It
A 401(k) plan is not entirely disadvantageous. Following is an overview of reasons why you would want to consider keeping the 401(k) plan a bit longer:
- Limited Access to Loans
Most 401(k) providers allow holders to access loans based on their contributions; the 401(k) is used as collateral. This is not possible with an IRA plan; in this case, you would have to provide collateral personally.
- Limited Creditor Protection
A 401(k) plan provides assurance that creditors will not come after your retirement money because the plans are protected against bankruptcy and any resulting claims from creditors. IRA plans also enjoy some degree of protection from bankruptcy and claims by creditors, but this varies depending on your state’s laws; protection in most cases is limited to $1.36 million.
- Delayed Access to Funds
The earliest you can tap into your IRA funds is at about 59 years old, depending on your state’s laws and the agreement with your broker. With a 401(k), however, you can access your funds as early as 55 (but you would have to leave your job first).
Time is Money!
Retirement may seem a distant reality, but every day contributes to how much you are losing with your current retirement account (and how much you should be earning). As such, act now and learn how you can improve your retirement plan. We are here to help! Bogart Wealth is an acclaimed financial advisor company with an intimate understanding of the various retirement plans. We will answer all your questions and, if you wish, rollover your current retirement plan to a more profitable one. Get in touch today and tell us what you need — we have all the answers.