Retirement Plan: 7 Reasons to Roll Your 401(k) Into an IRA
My retirement savings are in a hodge-podge of tax-advantaged accounts accumulated over the years. That's okay. I've had several employers and been self-employed as well, and I'm in this situation because I've made good use of the tax-favored savings vehicles available to me.
But lately I've been thinking about simplifying, and I now find that the main reasons I've been holding on to multiple accounts are all but gone. The biggest decision for me, by far, is whether to roll over my 401(k) plan with a former employer (Time Warner) to my traditional IRA, where I would then have the vast majority of my retirement assets.
Why haven't I already consolidated my accounts in this fashion? My Time Warner plan has low fees and is easy to monitor online. But the clincher is that the plan includes the Dodge & Cox Stock fund, which at the time I left my full-time position with the company had been so hot for so long that the fund wasn't accepting new accounts. I had to leave my money in the old plan if I wanted to own that fund.
So when I moved on professionally I stayed put financially. That makes me oh-so typical, according to a new Fidelity Investments survey, which found that 59% of people eligible to roll over 401(k) plan assets to an IRA choose not to do so because they like their old plan's investment options.
Yet that still leaves a bunch of folks struggling with inertia: 27% in the survey said they didn't have the time to think about it. I counted myself among that group too, for a while. But I'm happy to say that I am now finding the time and have discovered, among other things, that the Dodge & Cox Stock fund I so cherished has been, in a word, deadly. It has lagged the S&P 500 stock index the last one-, three- and five-year periods.
My penchant for low-cost stock index funds practically guarantees that I'd have done better had I rolled those assets into my IRA. By the way, I still own a slug of my former employer's stock (which I saw as undervalued) in that plan as well, and while that holding has been paying off lately it too has lagged the market over the past five years. So it turns out that staying put has cost me.
I'm making changes now, and you might too if you've been hanging out in one or more old plans. Here are seven key reasons a roll over might make sense:
· More investment options In an IRA, you can invest in individual stocks and bonds or choose from the universe of mutual funds. Your 401(k) typically has just a handful of well-rounded choices. If you find too much choice overwhelming maybe you should stay where you are. Many 401(k) plans also have low fees. But you can get low fees and limited (but well-rounded) choice by sticking with index funds in your IRA.
· Consolidates accounts It's just easier to keep track of what you own and how it's doing, and to make changes, when everything is recorded on a single statement.
· Forces you to review your holdings I've been well diversified in my 401(k) -- except for that slug of Time Warner stock, which wasn't just undervalued when I left but which I had become emotionally attached to. It doesn't make sense for me to own it anymore.
· Penalty-free withdrawals Unlike a 401(k), an IRA gives you the flexibility to withdraw money early penalty free if the cash is for a first home or education expense.
· Possible better tax treatment If you qualify to roll over into a Roth IRA, you'll have to pay immediate tax but your money will then grow tax-free as opposed to tax-deferred.
· Possible better distribution rules If you roll over into a Roth, you do not have to start taking distributions in your 71st year, as is the case with a 401(k) after you've stopped working.
· Unlocks company stock value If you are fortunate to have highly appreciated company stock in your 401(k) plan, you can separate it during the roll over process and move those shares "in kind" to a taxable account. You'll pay immediate income tax only in the cost basis of the shares and later will be free to sell the shares owing only the capital gains tax, which for most people is less than the income tax applied to a 401(k) distribution.
There are some things to look out for. If you are between 55 and 60, you might be better off in the old 401(k) because money can be taken out without penalty. Your old 401(k) may also give you low-cost access to an individualized, professionally run portfolio.
You might also consider rolling your assets into a new employer's plan, which may preserve your ability to take a loan from the plan should the need arise and allow you to defer distributions beyond your 71st year if you keep working. But if you have no compelling reason to stay, you might as well go and simplify your life.
Chart courtesy Fidelity Investments
More on MoneyWatch:
· Retirement Plan: Delay the Date But Not the Dream
· Time Travel: The Key to Financial Security
· 5 Ways You Fool Yourself into Spending too Much
Daniel J. Kadlec is an author and journalist whose work appears regularly in Time and Money magazines. He is the former editor of Time’s Generations section, which was written and edited for boomers. Kadlec came to Time from USA Today, where he was the creator and author of the daily column Street Talk, which anchored the newspaper's business coverage. He has co-written three books, including, most recently, With Purpose: Going from Success to Significance in Work and Life. He has won a New York Press Club award and a National Headliner Award for columns on the economy and investing.
Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
