Life is full of transitions, and leaving a job is often a significant one. As you navigate new opportunities, one critical decision is what to do with your old 401(k).
Should you leave it with your former employer, transfer it to a new employer’s plan, or roll it over into an Individual Retirement Account (IRA)?
For most people, rolling over an old 401(k) to an IRA is a smart move. Let’s explore why, along with the steps involved and a few potential pitfalls to watch out for.
Why Roll Over Your 401(k) to an IRA?
When you roll over your 401(k) to an IRA, you open the door to several advantages that can enhance your financial future:
1. Expanded Investment Options
Most 401(k) plans offer a limited selection of investment choices, typically mutual funds and, occasionally, company stock. In contrast, an IRA provides a broader array of options, including individual stocks, bonds, ETFs, and even alternative investments like real estate or precious metals. This flexibility allows you to customize a portfolio tailored to your risk tolerance and long-term goals.
2. Lower Fees
401(k) plans often come with administrative and management fees that can take a significant bite out of your returns over time. This is particularly true for plans associated with smaller employers. IRAs, on the other hand, often have lower fees, especially when you select a low-cost provider. Reducing fees can lead to substantial savings over the course of your retirement.
3. Simplified Management
If you’ve worked for multiple employers, you might have several 401(k) accounts to manage. Consolidating them into a single IRA makes it easier to monitor your investments, rebalance your portfolio, and ensure your beneficiary designations are up to date.
How to Roll Over Your 401(k) to an IRA
Rolling over your 401(k) doesn’t have to be complicated. Here are the key steps:
1. Open an IRA
If you don’t already have an IRA, you’ll need to open one. Sterling Edge Financial can help you choose an account that suits your needs.
2. Request a Direct Rollover
Contact your 401(k) plan administrator and request a direct rollover to your IRA. This method ensures the funds are transferred directly between accounts, avoiding taxes and penalties.
3. Choose Your Investments
Take this opportunity to review your asset allocation and select investments that align with your retirement goals with your financial planner / advisor.
4. Update Beneficiary Information
Ensure the beneficiary designations on your new IRA reflect your current wishes. It is common to see funds get lost or transferred to beneficiaries who are not part of updated estate plans. Consolidating/ rollover over old retirements accounts to your IRA can help you avoid this error.
Potential Pitfalls to Avoid
While rolling over your 401(k) to an IRA offers many benefits, there are a few potential challenges to keep in mind:
1. Losing Access to Unique 401(k) Features
Some 401(k) plans offer exclusive benefits, such as access to stable value funds or 401(k) loan options, which may not be available in an IRA. Consider these features when making your decision.
2. Missing the 60-Day Deadline
If you opt for an indirect rollover—where you receive a check from your 401(k) and deposit it into your IRA—you must complete the process within 60 days to avoid taxes and penalties. A direct rollover is typically a safer choice.
3. Overlooking Outstanding Loans
If you have an unpaid 401(k) loan, it must be repaid before the rollover. (with few exceptions) Otherwise, the loan balance will be treated as a taxable distribution and may incur a 10% early withdrawal penalty if you’re under 59½.
Conclusion
Rolling over your old 401(k) into an IRA is often the best choice when you leave a job, offering you greater investment flexibility, lower fees, and simpler management of your retirement savings. That said, it’s important to evaluate your individual circumstances and weigh any unique benefits your 401(k) may provide.
At Sterling Edge Financial, we’re here to guide you through every step of the process, ensuring your retirement savings are working as hard as you do. If you’re considering a rollover or have questions about your financial future, let’s talk—together, we can make confident, informed decisions for a secure retirement.