There are a lot of reasons to love 401(k)s: They have higher contribution limits, the money comes right out of your paycheck every month so you don’t have to remember to transfer it, and your employer might match some of your contributions. But 401(k)s also have their drawbacks. Here are four reasons you may want to consider rolling over your 401(k) into an IRA.
1. IRAs have more investment choices
Most 401(k)s contain a few investment options selected by your employer. You might be happy with these options, but if you’re not, there isn’t much you can do about it. You can request that your employer add more investments, but it does not have to comply. Or you could roll over your 401(k) savings into an IRA.
IRAs offer a virtually unlimited selection of investments, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. You can spread your money among as many of these assets as you choose, and change your asset allocation as often as you like. Not everyone will feel confident enough to choose their own investments from such a broad selection, but if you prefer to have more control over your retirement savings, an IRA is a better choice for you.
2. IRAs often charge lower fees
All retirement accounts, including IRAs, charge fees. Your brokerage will have a fee schedule, and your investments may have their own fees. Mutual funds, for example, charge an annual fee called an expense ratio. This is usually a percentage of your assets.
401(k)s also have fees, which can be higher than IRA fees, especially for smaller companies. Having fewer employees means that each one has to shoulder a greater portion of the 401(k)’s administrative fees. The investments your employer selects for the plan may also have higher fees than you’d like to pay. These can eat into your profits and slow the growth of your retirement savings over time.
With an IRA, you’re free to choose low-cost investments and work with the broker that’s most affordable for you, so you can reduce what you’re paying in fees and help your savings grow more quickly.
3. Roth IRAs aren’t subject to required minimum distributions (RMDs)
Required minimum distributions (RMDs) are mandatory withdrawals from retirement accounts that begin at 72 unless you’re still working and own less than 5% of the company you work for. The only accounts not subject to RMDs are Roth IRAs. These accounts are funded with after-tax dollars, and the government doesn’t tax distributions, so it has no reason to make you withdraw money from these accounts early.
RMDs may force you to withdraw more money from your retirement accounts than you’d like to, raising your tax bill and hampering the growth of your savings. But stashing some of your money in Roth IRAs can help you avoid this. You’re free to draw upon this money as needed, and you don’t have to use it at all if you don’t want to.
Roth IRAs aren’t the best choice for everyone, though. They make sense if you expect you’ll be in the same or a higher tax bracket once you retire, but if you think you’ll be in a lower tax bracket once you retire, a traditional IRA might make more sense. You’ll pay taxes on your distributions, but you’ll lose a smaller percentage of your income to the government.
4. Rolling over your 401(k) lets you manage all your funds in one place
It’s not impossible to manage your retirement savings if they’re spread out among several different accounts, but it’s definitely easier when they’re all in one place. You can see all of your investments and fees together and make changes to your asset allocation without having to log into multiple retirement accounts.
Consider rolling over your 401(k) to an IRA if any of the above benefits appeal to you, but think through the decision carefully. The larger contribution limits and possible 401(k) match might make it worth staying with your 401(k) if you’re happy with its investment choices and fees.
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