What Are the Benefits of Rolling a 401k into an IRA?
The benefits of rolling over a 401k into an IRA, or individual retirement arrangement, are many when considering how each of the two retirement plans work. Although businesses benefit from keeping former employees enrolled, many employees prefer to roll their 401k balances over into IRAs when leaving employers. What matters in the end are personal needs of the individuals and the return on their invested dollars.
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More Choices
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With a 401k offered by a large employer, the employee usually gets only a few choices of where to invest retirement dollars. For a large company it's more manageable to offer a few choices in accounts. By rolling over your 401k into an IRA you can shop around different brokerage houses, banks, credit unions and any other financial institutions you wish to find the right mix of investments for your retirement portfolio.
Greater Access
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A 401k gives you the ability to borrow money from yourself. But you have to pay it back. If you lose the job, you may have to pay it all back immediately. With an IRA the money is yours to withdraw -- albeit with a 10 percent penalty -- at any time. You can remove money without penalty for certain approved investments such as a first home or to pay education bills.
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Matching Contributions
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The biggest advantage of the 401k for individuals is that it gives their employers the opportunity to contribute retirement funds. This is a bump in gross income that is sheltered from taxes in the near term. However, because of changes in the economy many companies are ending the practice of matching contributions. This eliminates the most attractive feature of the 401k.
Less Expense
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The management fees and loads on 401ks tend to be higher than fees on IRAs. Most individuals aggressively shop around to avoid fees. This competitive pressure doesn't exist in the world of 401k's. By rolling over funds to an IRA, more your pension contributions go into your pension than do so with many 401k accounts.
Simplicity
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One advantage of rolling over your 401k plan into an IRA is the ability to more easily manage your retirement assets. For retirees who must take distributions out of their retirement programs per Internal Revenue Service rules, having as few retirement accounts as possible makes for easier management. For workers still contributing, diversity is never a bad thing, but managing too many accounts can be. By rolling over old accounts into one IRA, the process of managing them because much easier.
Disadvantages
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Fees are sometimes associated with rolling over retirement accounts. If the return on investment doesn't exceed the costs of rolling over the 401k, it might be a bad idea to roll over the 401k. Also, it is easier to distribute funds from a self-directed account such as an IRA than a managed account such as a 401k. Upon the account holder's death, an IRA can go directly to an heir with no taxes or penalties necessary for the early distribution.
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