Is it Better to Rollover to a 401k Or an IRA?
As baby boomers continue to switch jobs frequently, it can be easy for their retirement accounts to accumulate over time. Consolidating them all into an IRA could be an advantageous financial strategy.
Direct rollover is more straightforward: the new IRA provider writes directly to you with your check, less any taxes withheld for taxes. An indirect rollover requires additional steps.
If you move money from one employer’s plan to an IRA, the IRS will treat this move as a rollover; however, you can minimize or avoid taxes by opting for direct transfer; this allows funds from your old retirement account directly into your new one without ever touching either account directly.
Many 401(k) plans charge high fees, so moving them directly to an IRA could save money in the long run. Just make sure you understand their procedures for direct transfers as they may have specific requirements you must fulfill in order to complete them successfully.
An Individual Retirement Account, or IRA, provides access to more investment options like no-load mutual funds and commission-free ETFs. They’re also useful for consolidating investments into one place and making management simpler; but before opening one yourself it is wise to consult a financial advisor first to ensure it suits your unique circumstances and that’s where SmartAsset comes in – our free tool connects users with local advisors who are ready to assist.
Fees associated with 401k plans might not seem like much at first glance, but they can quickly eat away at your retirement savings over time. While IRAs typically charge lower fees, some brokerages charge an annual maintenance or advisory service fee that eats into your savings over time.
Pew Charitable Trusts conducted a study revealing that over 25 years, investors would owe $45.5 billion in lost earnings due to fees by moving their 401ks from employer plans into individual retirement accounts (IRAs). Stock and bond fund holders stand to lose even more.
Many 401k participants don’t realize the total fees they pay in fees; these costs may be deducted directly from their assets without their knowledge and hidden within expense ratios, subtransfer agency fees and variable annuity wrap fees. But don’t fret; most fees can be avoided simply by rolling your 401k over into an IRA.
3. Investment options
IRAs typically provide more investment options than 401(k) plans due to employers having the legal duty of selecting funds that best serve their employees.
Employer plans offer savers access to economies of scale that may result in lower annual fees; target-date funds automatically adjust their mix of stocks and bonds as investors near retirement age.
However, some savers may prefer keeping company stock in their 401(k) plans rather than rolling it over into an IRA, as this would expose them to preferential capital-gains tax rates in retirement instead of ordinary income taxes. It may be worthwhile considering this option for those expecting higher tax brackets down the line; just bear in mind that you can only roll one IRA into another once each year without incurring tax obligations on any additional amounts you move between accounts.
With direct rollover, your distribution from your old provider is sent directly to your new one – eliminating any steps that might get it tangled in tax problems. However, to maintain tax-free status within 60 days you must redeposit it at your new provider.
Changing jobs often (baby boomers on average change employers 12 times during their careers, according to the Bureau of Labor Statistics) can make managing your retirement plans more manageable by consolidating them into one account with lower fees to manage. A financial planner can help assess whether rolling over is beneficial in terms of reduced investment fees, consolidation and offering a wider variety of investments than what’s offered through multiple accounts; our retirement experts use primary sources like interviews with experts, government websites, academic research papers and peer reviewed studies for our reviews; more details can be found under “How We Reviewed.”
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