You may think you're taking control of your future by maintaining a qualified retirement plan offered by a former employer, such as a 401(k), 403(b), or government 457 plan. But are you? Some retirees take a passive approach to their retirement assets, keeping accounts with past employers for the sake of simplicity or maybe even laziness. Bust others are smarter who pursue 401k rollovers.
If you have a retirement account with just one employer, you may have suitable investment options and may pay low fees, so it might make sense to leave your retirement assets in your former employer's retirement plan. But do check the 401k plan fees, which means reading the prospectus. if you won't do it, then get a financial advisor to do it.
But if you have multiple retirement accounts with different former employers or if your investment choices are limited, consider combining your assets into one traditional Individual Retirement Arrangement, commonly know as 401k rollovers as the funds almost always come out of 401k accounts.
401k rollovers (or rollover from any type of retirement plan) could provide you with greater flexibility than your current plan(s). For example, some qualified retirement plans may offer limited investment options, one of which may be the employer's stock. That limitation could put your retirement savings at risk, particularly if your savings are concentrated in just a few funds or even in a single company's stock. In contrast, a self-directed 401k rollover could offer virtually unlimited investment options, allowing you to potentially allocate your retirement funds more appropriately according to your personal investment goals.
It might be difficult to manage investments spread between multiple retirement plans. If you have more than one retirement account, consolidating your retirement assets into a single 401k rollover could make it easier to manage and track your investments with considerably less paperwork. In addition, keeping retirement assets in one place simplifies beneficiary designations and estate planning.
A major motivation for 401k rollovers is that mutual funds available through your current plan may have high expense ratios. A small savings of even half a percentage point in fund expenses can mean thousands of dollars more in your account over a few years. In your own 401k rollover, you have control over the investments you select and the expense ratios you feel are appropriate. The mutual fund cost calculator available from the Securities and Exchange Commission (SEC) can help define just how many dollars. Just go to www.sec.gov, and click on 'Tools and Calculators for Investors' under 'Investor Information.'
The best news: When you make a direct IRA rollover, no money is actually distributed to you; it moves straight into the 401k rollover conversion account. So you're not taxed until you withdraw the money later, and 100% of your retirement assets can continue to work for you on a tax-deferred basis.
Now, there are some complications with 401k rollovers, with moving money from an employer-sponsored retirement plan into a an IRA. Your plan may have some limitations on 401k rollovers. For example, some plans may restrict IRA rollovers while you are currently employed by the company that offers the plan. And, if any part of your investment is held in stock, you will need to find out the plan has rules about selling your shares. Additionally, there may be different creditor protection issues when funds are in a company plan vs. a 401k rollover. These vary with each State so you need to check with your IRA rollover custodian.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions
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