There are several reasons why a person might consider transferring 401k assets to an individual retirement account (IRA). Visiting a qualified financial advisor can help you review your plan options and restrictions and consider alternatives.
• Asset Consolidation – You may have worked for multiple employers during your career. If so, you may have multiple 401k accounts with different investment allocations. It may be beneficial to consolidate your accounts. Doing so could make it easier to track your assets and allow you to assess whether your retirement investments are suitable.
• Increased investment options: Your employer-based 401k plan has limited investment options. Converting your 401k plan to an IRA will likely increase your investment options. This may allow you to better achieve your investment objectives, as it will increase your access to a wider variety of asset classes and different investment funds.
Your plan may also be limited to multiple equity funds and may not include high-yield mutual funds. Understanding what investment options your 401k offers can be important in determining your ability to create an appropriate investment strategy within the plan or whether you would be better served elsewhere.
Understanding your investment options is particularly important when we are in “bear markets.” It takes more experience and supervision to perform well in a bear market than in a bull market. Having more investment options and a broader set of asset classes could make all the difference in preserving and growing your resources.
• Remove restrictions on the sale of investments: Some 401k plans restrict money matching in a 401k account. This is common with company stocks. Participants cannot sell the company’s stock while in the 401k plan. Executing a direct rollover to an IRA when the company’s shares can be shipped in the form of shares would solve the problem. Once the shares are in the IRA, you can decide to keep them or sell them. Also, some companies limit the number of trades non-active employees can make. Moving to an IRA would remove these restrictions and limitations.
• Guidance and professional service. Let’s face it: You can get investment advice from countless sources today. However, determining which advice to trust is difficult. Getting advice from 401k administrators can also be challenging. You can hardly hope to develop a personal relationship with someone who works for the administrator. The 401k administrator is simply a record keeper for most participants.
You may have established other investment accounts and developed a relationship with a financial advisor. This person knows you and your family, he knows your goals and style, and he is someone you have built trust with.
Your adviser is usually just a phone call away, not an anonymous voice at the end of a service center phone line. You meet the adviser and get an idea of his knowledge and investment philosophy. Your advisor can also bring a holistic perspective to your financial planning, since they understand more than just your retirement assets.
• Simplify your sources of income – If you have had multiple employers and/or have established an individual retirement account, you may receive distributions from multiple places. You can simplify your distribution flow by consolidating your accounts. You can join multiple accounts and enjoy simple distribution by rolling your 401k assets into an IRA.
• Separation from previous employer: Leaving a job may not be a pleasant experience. You may be forced to retire or be laid off. If your departure from your previous employer was not on good terms, you may want to take your retirement assets with you. Even though your previous employer can’t “touch” your 401k, the employer is still in charge of the plan and can change it if they feel it’s necessary. They can change providers, modify the fee schedule or remove investment options. The employer retains indirect control over your account and will make plan decisions based on objectives that do not consider your goals.
• Increase withdrawal flexibility at retirement: Withdrawal flexibility varies among 401k plans. Some plans do not offer partial withdrawals for retirees. Others limit the number of withdrawals participants can make annually. On the other hand, IRA accounts offer unlimited withdrawal availability. Clients can withdraw money as often as they like in variable amounts. However, please understand that these withdrawals may have tax implications based on age. You have worked hard to save money for retirement. It makes sense to invest your money in a vehicle that gives you the flexibility to respond to your changing needs over time.
• Prorated Withdrawals – When 401k clients make withdrawals, the money often comes out prorated. This means that money is withdrawn from the account in the same percentages that were invested in your 401k plan. The client cannot select from which fund or funds within the plan to withdraw money. This may force you to sell investments you like, such as company shares or a favorite fund.
IRAs don’t work that way. With an IRA, you can select which funds to withdraw from, allowing you to withdraw in a way that best suits your goals and needs.
• Personalized tax withholding: An IRA offers other retirement benefits. When you withdraw from a 401k plan, the administrator must withhold a minimum of 20 percent for income taxes. Customers can choose to have a higher amount withheld, but cannot choose a lower amount. IRAs allow you to determine how much to withhold from a distribution to cover taxes. So if you withdraw $35,000 in January and want to withhold just 10 percent for taxes, you can. Why give the IRS more than you think you will owe and give it to them months in advance?
• Improve the transfer of resources to non-spouse beneficiaries: 401k plans do not transfer well to non-spouse beneficiaries. In many cases, non-spousal beneficiaries must receive a lump sum distribution or receive distributions over a five-year period. This does not allow non-spousal beneficiaries to “spread” the use of this money over an extended period of time.
Any distribution would also be taxed in the non-spousal beneficiary’s income tax bracket, which could be when the person is in the highest tax bracket they will achieve. Converting your 401k to an IRA would improve the transfer of resources to a non-spousal beneficiary. An IRA allows people to defer withdrawals until they reach retirement and stretch withdrawals over their lifetime.