Retirement is an exciting milestone, but it also comes with important financial decisions, including what to do with your 401(k) savings. If you’re retiring soon, rolling over your 401(k) to an Individual Retirement Account (IRA) could be one of the smartest financial moves you can make. Keep reading to find out why.
What Is a 401(k) Rollover?
The process of moving money from your employer-sponsored retirement plan into an IRA is known as a 401(k) rollover. This gives you more control and flexibility over your investments while enabling you to keep increasing your retirement savings.
There are two primary ways to roll over a 401(k):
- Direct rollover: Your 401(k) provider transfers the funds directly into your new IRA, which avoids taxes and penalties.
- Indirect rollover: You receive the funds and must deposit them into an IRA within 60 days. Otherwise, you may have to pay taxes and penalties.
Why Consider Rolling Over Your 401(k) to an IRA?
Several reasons make rolling over your 401(k) plan to an IRA a great move. Some of them include:
1. Greater Investment Options
With most 401(k)s, you don’t get many choices for where to put your money – usually just a few mutual funds. But if you go with an IRA, you can access a broader range of investments, including:
- Individual stocks
- Bonds
- Exchange-traded funds (ETFs)
- Real estate investment trusts (REITs)
- Alternative investments
These options can help you manage your risk and tailor your portfolio to match your retirement goals.
2. Lower Fees and Costs
401(k) plans often come with high administrative fees and generally higher expense ratios of investment funds. Over time, all these fees can reduce the profits which you would have gotten. Several IRAs have much cheaper and better investment options, leaving most of your money invested and continually growing.
3. More Control Over Withdrawals
After you retire, you will need to withdraw funds for your living expenses. 401(k) plans often dictate strict withdrawal rules with limited options for distributing any account balance, sometimes even forcing you to take an entire lump sum. An IRA allows for better flexibility by allowing you to:
- Choose when and how much to withdraw (within IRS-required minimums after age 73).
- Set up systematic withdrawals that fit your retirement budget.
- Avoid mandatory withdrawals if you choose a Roth IRA (which has no required minimum distributions or RMDs).
4. Simplify Your Retirement Accounts
Many retirees have numerous 401(k) accounts from previous employers. Transferring them into a single IRA account carries significant advantages and allows you to:
- Simplify tracking the performance of your investment portfolio.
- Minimize paperwork and operational account maintenance.
- Adjust your investment strategy as needed.
5. Estate Planning Benefits
If you’re considering passing on your wealth, an IRA often has better estate planning options than a 401(k). For example, your beneficiaries may have more options for withdrawing funds so they can effectively plan for taxes.
With IRAs, there is typically a “stretch” provision due to which these accounts would allow heirs to take withdrawals over time instead of all at once.
Are There Any Downsides to Rolling Over Your 401(k)?
Although your 401(k) can roll over into an IRA, there are some things you need to consider before making the switch:
- Losing employer protections: 401(k) plans have powerful legal protections under the Employee Retirement Income Security Act (ERISA). Depending on the laws in some states, IRAs have a lesser degree of protection from creditors.
- Required Minimum Distributions (RMDs): Traditional IRAs have Required Minimum Distributions (RMDs) starting at age 73, while some 401(k) plans will allow you to postpone RMDs if you are still working.
- Potential Roth conversion taxes: If you are considering converting your 401(k) into a Roth IRA, be careful that the amount transferred will be taxed as income.
Who Should Consider a 401(k) Rollover?
Retirees (Ages 55-70)
If you’re already retired or plan to retire soon, rolling over to an IRA can help protect your savings while giving you the flexibility to take money out as needed. Since you won’t be making contributions to your retirement account, your focus should be on maintaining your nest egg and producing a steady income.
Best move if: You want greater control over withdrawals, fewer costs, and more investing possibilities.
Mid-Career Professionals (Ages 45-55)
When you’re changing employment or combining retirement accounts, an IRA will give you more control over your investments. By customizing your portfolio to fit your long-term objectives and risk tolerance, an IRA gives you the power to take control of your financial future.
Best move if: You would rather have more options for investments and pay less for management than
How to Roll Over Your 401(k) to an IRA in 3 Steps
If you decide to roll over your 401(k), here’s how to do it efficiently:
- Choose an IRA provider: Select a reputable financial institution that offers the investment options and support you need.
- Request a direct rollover: Contact your 401(k) provider and request a direct rollover to avoid tax penalties.
- Allocate your investments: Once your funds arrive in the IRA, work with a financial advisor to select investments that match your retirement strategy.
Is a 401(k) Rollover Right for You?
While rolling over a 401(k) to an IRA isn’t ideal for everyone, many retirees and working professionals find it provides more control, reduced costs, and greater flexibility in investment options. If you are still on the fence about whether it’s the best choice for you, the input of a reliable financial advisor can help you decide on the best course of action that aligns with your retirement objectives.
Key Takeaways
- Rolling over your 401(k) to an IRA can give you more investment options, lower fees, and greater control in retirement.
- IRAs offer flexibility with withdrawals, estate planning, and consolidation of multiple accounts.
- There are trade-offs, including differences in legal protections and required minimum distributions (RMDs).
- A 401(k) rollover is especially beneficial for retirees seeking income flexibility and professionals who want more control over their investments.
- Working with a trusted advisor can help you navigate the rollover process and build a retirement strategy aligned with your goals.
Ready to Take the Next Step?
Rolling over your 401(k) could be one of the most important financial decisions you make on the path to a secure retirement. At Washington Park Advisors, we specialize in helping clients like you make confident, well-informed choices about your wealth.
Schedule a complimentary call with our team today to explore whether a 401(k) rollover is right for you:
We’re here to help you retire with clarity, confidence, and peace of mind.
