Should I Roll a 401(k) Into an IRA?

Your first instinct when leaving a job, for retirement or a new opportunity, may be to take your money with you, by rolling it into an Individual Retirement Account (IRA). That may not be such a bad idea. However, keep in mind that the financial advisor telling you to do so may be getting a commission or fee when you take that action. However, just as there may be reasons to take your 401(k), says AARP in the article “What to Do With Old 401(k) Accounts,” there are also some good reason to leave it exactly where it is. Consider these questions before making a decision:

What does it cost to stay or to leave? Small plans, by which we mean those with fewer than $10 million in assets, charge an average of 1.1. percent annually for administrative fees and investment management, according to a 2018 study that focuses on the costs of 401(k)s from BrightScope. If you are in this type of plan, you may do better by rolling money into a low- or zero-fee IRA at a no-load mutual fund and buying inexpensive funds.

Big plans, with $250 million and more in assets, can be competitive with IRAs. They offer low-cost index funds or target date funds that allocate assets between stocks and bonds and shift those mixes as you age. Your plan in one of these might cost less than 0.5 of your assets per year.

For a complete picture, note that funds suggested by a broker may cost more than that. A financial advisor will also have a higher fee, since most are paid by a percentage of your total assets. There once was a law that required advisors to compare the cost of your current 401(k) with any new investments they recommend, but that law was squashed. Therefore, investors have to do the homework to get clear on their costs.

Do you have enough choices? The average 401(k) fund today offers about twenty-four mutual funds to create a balanced portfolio. It might also offer a stable value fund, like a money market account, that pays higher interest rates than you might get in other products. With IRAs, you have many more choices, but that may not be much of a factor.

How easily can you access your money? A prior employer’s plan may give you the option of a withdrawal at any time, or at least a monthly withdrawal. If that’s not available, an IRA may be better.

Do you need the money? Are you 50 or older? For most people, rolling a 401(k) into an IRA and then making a withdrawal before turning 59½, means a 10% tax on the withdrawal plus regular income taxes. If you leave work the same year you turn 55 or later, you can withdraw money out of the employer’s 401(k) without paying that extra tax.

Are you in debt? Most creditors cannot access a 401(k) account. However, if you live in a state that permits it, they might be able to get to an IRA account.

How is your plan working for you so far? If your account has low-cost funds and you like the way things are going, there may be no point in making any changes. Stay the course.

Reference: AARP (June 10, 2019) “What to Do With Old 401(k) Accounts”

Suggested Key Terms: IRA, 401(k), Rollover, Creditors, Mutual Funds, Low-Cost Funds, No Load Fund

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