Do an IRA Rollover After Leaving Your Job

I often encounter questions about the best strategies for managing retirement savings. One common query is whether employees should transfer their 401(k) savings into an Individual Retirement Account (IRA) after retiring or switching jobs. The short answer is yes, and in this article, I will explain why this is generally a smart move for most people. I will also discuss the benefits of an IRA, the process of transferring your 401(k), and some potential pitfalls to avoid.

Why Transfer Your 401(k) to an IRA?

There are several reasons why transferring your 401(k) to an IRA can be a wise decision. Here are the main benefits:

More Investment Options

One of the primary advantages of an IRA over a 401(k) is the wider range of investment options available. Most 401(k) plans offer a limited selection of mutual funds, and sometimes even company stock. In contrast, an IRA allows you to invest in a broader array of assets, including individual stocks, bonds, exchange-traded funds (ETFs), and even alternative investments like real estate or precious metals. This increased flexibility can help you build a more diversified and personalized portfolio that better aligns with your risk tolerance and investment goals.

Lower Fees

401(k) plans, especially ones that originated at smaller firms, can sometimes incur high fees, which can eat away at your returns over time. These fees can include administrative costs, investment management fees, and even sales charges for certain funds. Sometimes these fees can increase after an investor leaves their job. On the other hand, IRAs typically have lower fees, especially if you choose a low-cost provider. By transferring your 401(k) to an IRA, you can potentially save thousands of dollars in fees over the course of your retirement.

Easier Management

If you have multiple 401(k) accounts from different employers, consolidating them into a single IRA can simplify your financial life. Instead of juggling multiple account statements, investment options, and beneficiary designations, you can manage all of your retirement savings in one place. This can make it easier to track your progress, rebalance your portfolio, and make any necessary adjustments as you approach retirement.

How to Transfer Your 401(k) to an IRA

Transferring your 401(k) to an IRA is a relatively straightforward process. Here are the steps to follow:

1. Open an IRA account. I can do this for you! If you already have an IRA, you can use your existing account.
2. Contact your 401(k) plan administrator and request a direct rollover to your IRA. This is also known as a trustee-to-trustee transfer, which ensures that the funds are moved directly between the two accounts without being subject to taxes or penalties.
3. Choose your investments within your IRA. This is an excellent opportunity to review your asset allocation and make any necessary adjustments.
4. Update your beneficiary designations on your new IRA account.

Potential Pitfalls

While transferring your 401(k) to an IRA is generally a smart move, there are some potential pitfalls to be aware of:

1. Losing access to unique investment options: Some 401(k) plans offer access to unique investment options, such as stable value funds or institutional-class shares of mutual funds, which may not be available in an IRA. Be sure to weigh the benefits of these options against the advantages of an IRA before making a decision.
2. Missing the 60-day rollover window: If you choose to do an indirect rollover, where you receive a check from your 401(k) plan and then deposit it into your IRA, you must complete the process within 60 days to avoid taxes and penalties. To minimize this risk, opt for a direct rollover whenever possible.
3. Forgetting about outstanding 401(k) loans: If you have an outstanding loan from your 401(k), you must repay it before transferring your account to an IRA. Otherwise, the outstanding balance will be treated as a taxable distribution and may be subject to a 10% early withdrawal penalty if you are under age 59½.

Transferring your 401(k) to an IRA after retiring or switching jobs is generally a smart move that can provide you with more investment options, lower fees, and easier management of your retirement savings. However, be sure to consider any unique investment options in your 401(k) and avoid potential pitfalls like missing the 60-day rollover window or forgetting about outstanding loans. By carefully weighing the pros and cons and following the steps outlined in this article, you can set yourself up for a more secure and successful retirement.