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Why Rolling Over Your 401(k) Into an IRA May Be Your Best Bet for Retirement

Why Rolling Over Your 401(k) Into an IRA May Be Your Best Bet for Retirement

August 02, 2022

Few life events are equally exciting and stressful as retirement. The last thing you should have to worry about is what will happen to your 401(k). The good news: you have plenty of options and we’re here to help. In this post, we’ll reveal the following: 

  • Your 401(k) options after retirement 
  • Why it’s beneficial to roll over your 401(k) into an Individual Retirement Account (IRA) 

One of the best options (and one we often recommend to clients) is rolling a 401(k) into an IRA, but we’ll explain that in a second. First, let’s look at the 401(k) options you have as you enter your golden years. 

Options for Your 401(k)-Retirement Plan After Retirement 

When retiring, you typically have a few options with your 401(k)-retirement plan. Here is what you need to know. 

Option 1: Leave the money in your former employer’s plan. 

If it is permitted by your former employer and you have a substantial amount saved (usually a $5k minimum), you can leave your money exactly where it is. There are some risks with this option. If you’re likely to forget about the account or don’t like the investment plan, leaving it may not be a great option for you.  

Option 2: Cash out your 401(k). 

It is ALWAYS an option to cash out your balance and do whatever you want with it! We don’t recommend this method because it unnecessarily reduces your retirement funds. In addition, you will be taxed on the full amount. This is a particularly poor choice for those with large sums saved up. 

Option 3: Roll the assets into an IRA.  

This is the best option available, and we often recommend a 401(k) rollover into an IRA to our own clients. Let’s take a closer look at this option. 

Why You Might Want To Roll Over Your 401(k) Into an IRA 

Rolling over a 401(k) into an IRA is a great option for many retirees. Why? Simply put, you have far more flexibility when doing so! Here are some of the key benefits you can expect.  

You have more investment choices. 

A 401(k) has limited investment choices. But with an IRA, you can invest your money almost any way you want. You’re no longer limited to mutual funds. Instead, you can invest in stocks and bonds amongst other options.   

You will save on fees and costs. 

Over time, management and administrative fees can eat up a sizable chunk of your hard-earned investment. Rolling your money over to an IRA decreases your costs and helps preserve your retirement fund. 

An IRA has less rules that are easier to understand. 

It can be tough to wrap your head around all the details of a 401(k) plan and employers have a lot of say in how their plans work. With an IRA, the regulations are set by the Internal Revenue Service (IRS) and the same rules are followed by most financial institutions.  

One notable difference is that the IRS requires that 20% of distributions be withheld for federal taxes. On the other hand, you can elect to have zero taxes withheld with an IRA. And while we wouldn’t recommend withholding zero dollars (the tax bill – yikes!), you are able to select a tax withholding that works best for you. 

Roll Over Your 401(k) Into an IRA with Trusted Financial Planners 

Each retirement plan option offers advantages and disadvantages. If you are uncertain what action to take with your accounts, please reach out. Over the years, we have found the best financial decisions are the ones that consider all available options. 

Ready to talk about your 401(k)? Contact us today to learn more about your options and to discuss what will work best for you and your family’s future.