Significant life events, such as changing employers or entering retirement, should prompt you to consider rolling your retirement assets into an IRA. A rollover may be a wise financial move depending on your current financial situation. When done correctly, it can set you up for long-term financial success.
However, an IRA rollover is not your only option. Depending on your circumstances, it may make more sense to keep the money in your previous employer’s plan or, if it is available to you, transfer the funds to your new employer’s plan. Cashing out your plan also is an option but not often advised due to the high tax and penalty implications.
Benefits of an IRA rollover
Consolidating your investments into an IRA may give you a better overall picture of your portfolio’s asset allocation, making adjusting your holdings, calculating RMDs and managing assets for short- and long-term needs much easier. Additionally, your assets can continue to grow tax-deferred, and you may receive access to investing tools and guidance to advance your investment strategy.
An IRA can give you access to investment options, including mutual funds, stocks, bonds and exchange-traded funds (EFTs), which may not be available in an employer’s plan. Individual securities and alternative investments also can be included in an IRA, which is advantageous for those who want complete control over buy-and-sell decisions. Many workplace plans limit the number of times you can rebalance your portfolio each year, which may be a disadvantage for some.
Many employer plans offer loan provisions, which is not an option with an IRA. If the ability to take out loans from your portfolio is important to you, your best option is to stick with an employer plan. Employer plan participants can borrow up to $50,000 or 50% of their vested account balance — whichever is less. Borrowing from a 401(k) account — for a wide variety of reasons — is often one of the main reasons an employee remains on this type of plan.
Once outside an employer plan, you may face significantly higher internal fund fees. As a result, many opt to have the rollover professionally managed to ensure fewer fees. However, if you can eliminate employer management fees and gain access to investments with lower expense ratios, an IRA could be a more cost-effective option.
It works a bit differently for high-income earners. If you exceed contribution limits, you may consider a backdoor Roth IRA. A backdoor Roth allows one to make an after-tax contribution to a nondeductible IRA and convert it into a Roth IRA. This option can be a substantial benefit for many with no negative financial consequences
Maintaining financial stability necessitates a continuous evaluation of your investments. Many people leave their money invested with their former employer for the sake of simplicity, while others choose an IRA rollover due to flexibility and a hands-on approach to managing their assets. In either case, you may find value in consulting with a financial professional to assess your situation. Making the best decision can be difficult, but if you get it right, you can be adequately prepared for a comfortable retirement.