Q. My dad has a 401(k) plan — he’s no longer working. He also has an IRA. Are there estate planning advantages to rolling over the 401(k) plan into the IRA?
— Trying to help
A. Where and how you keep your retirement accounts matters little for your estate plan. Same is true for tax planning.
But there are still many advantages to rolling over a 401(k) to an IRA.
By doing the rollover to the same custodian where your dad holds other accounts, the accounts will be consolidated. This can make it easier for your father to withdraw Required Minimum Distributions (RMDs) from the IRA and manage it on an ongoing basis, said Kelly Henning, a certified financial planner with Modera Wealth Management in Westwood.
“In an IRA, you have a large number of investments to choose from. In a 401(k), you are limited by the investment choices of the company plan,” Henning said. “These investment choices can be expensive and not very diverse.”
Henning said because IRAs allow for a multitude of investments, the owner can select investment products with low costs as opposed to the 401(k) account, which tend to have mutual funds with higher fees.
With a 401(k) plan, you’re also paying extra for ongoing management fees for the plan. Henning said if you’re no longer participating, it doesn’t make sense to pay the extra.
Even with advantages, there is one big reason your dad may want to keep his 401(k) at his current employer.
“Certain 401(k)s have protection under ERISA (Employee Retirement Income Security Act), which protects the account if an individual files for bankruptcy,” Henning said. “IRAs are non-ERISA plans, but are protected up to $1,000,000.”
Henning said for most investors, that shouldn’t be a major factor in the decision process.
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