13 Jan I retired. Should I move my 401(k) to an IRA?
Q. I retired from my job on April 3, 2020. I have a 401(k) with this employer with a balance of approximately $600,000. Should I rollover the 401(k) into an IRA or leave it where it is?
A. Congratulations on your retirement.
There are many reasons why someone may leave their 401(k) in place after leaving a job.
The perception of lower costs is one of the main reasons.
But there’s been a lot of questions surrounding the lack of transparency of 401(k) plan fees.
Some 401(k) plan costs are actually quite high, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.
“I think it’s worth looking at the internal fund fees — expense ratios — on the investments in your 401(k) and comparing them to what similar investments may cost in an IRA,” he said. “This will require a bit of research on your part, but it’s worthwhile to take the time to do it so you know what you are dealing with.”
Arguably the best reason for keeping assets in a 401(k) plan — whether that’s rolling it into your new employer’s 401(k) or keeping your old one — applies only if you’re planning to retire between ages 55 and 59 ½, DeFelice said.
“In general, you must pay a 10% early withdrawal penalty if you take money out of your 401(k) or IRA before you reach age 59½,” DeFelice said.
There is, however, an important exception for 401(k) plans: Workers who leave their jobs in the calendar year they turn 55 or later can take penalty-free withdrawals from that employer’s 401(k) plan, he said.
But if you roll that money into an IRA, you’ll have to wait until you’re 59½ to avoid the penalty unless you qualify for one of a handful of exceptions, he said.
Keep in mind that you will still have to pay taxes on the withdrawals. If you don’t intend on retiring prior to age 59 ½, or won’t need to draw down retirement monies to live on between ages 55 and 60, then this is a moot point, he said.
Depending on your situation, fees and withdrawal options are not the only things to consider, DeFelice said.
One could make the argument that there are more pros to rolling your old 401(k) into an IRA than cons.
First and foremost, DeFelice said, with a 401(k), your investments are restricted to the fund choices offered by the plan which are often limited. With an IRA, you can invest in any mutual fund, exchange-traded fund, bond, stock, real estate investment trusts and more.
“Workers today change jobs on average seven to 12 times during their careers, and leaving your plan behind could result in a mishmash of overlapping funds that may not suit your age and tolerance for risk,” DeFelice said. “We have found that when left at the company many investors stop rebalancing their portfolios or even making any changes at all to their investment mix as they get older.”
In that case, he said, it can make sense to consolidate all your old 401(k) plans into an IRA. It will be easier to keep track of performance and rebalance as needed, he said.
“As your life evolves, do not underestimate how much this can simplify things for you,” he said.
Additionally, DeFelice said, most 401(k) plan providers do not offer fiduciary investment advice or financial planning.
“If you want to hire an advisor who operates as a fiduciary — one who is upheld to acting in your best interest — and can coordinate your retirement investments with a broader financial plan, you may want to consider moving the funds into an IRA,” he said. “The right financial advisor can help you make better choices to grow your overall wealth with a lifetime of professional advice.”
As with any major financial decisions you should take the time to consider your options carefully.
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This story was originally published on Jan. 13, 2021.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.