Should you rollover your 401(k) to an IRA?

Should you rollover your 401k or other retirement plans to an IRA when you retire or leave your job?

Today we’ll discuss the pros and cons so you can make a smart decision.

Should you rollover your 401(k) to an IRA?

Resources:

Full transcript:

SPEAKERS

Alex Okugawa & Anthony Saffer

Alex Okugawa 0:00
Should you rollover your 401(k) or other retirement plans when you leave your job or retire? Today, we’re going to discuss the pros and cons so that you can make a smart decision. Hey there, it’s Alex and Anthony from One Degree Advisors, and we help you gain confidence in your retirement. So Anthony, a lot of people maybe they have a 401(k), or other types of retirement plans, and either they’re retiring, or they’re leaving their job. And so they’re wondering, should I move this account over into an IRA? Should I roll it over? And for some people, that is like the default, but today we’re going to discuss why maybe that’s not always the right solution. So we’re going to talk about some pros and some cons of should you rollover your 401(k), or other retirement plans into an IRA. And so let’s go through the pros first. The first pro is organization.

Anthony Saffer 0:53
Having your finances organized and understandable, it’s really half the battle of planning. So when people have multiple jobs, and they have all these 401(k)’s or other retirement plans spread out, it makes it very difficult, as opposed to rolling it into an IRA that can be consolidated. And this even really becomes much more important when you get to required minimum distributions and have to start taking those out.

Alex Okugawa 1:13
And the thing is, let’s say, even if folks have one 401(k), they don’t have multiple 401k. So you still have to deal with the administration of that 401(k) plan. You know, remember, you don’t work there anymore. And so, maybe you don’t get all the updated notices or filing requirements, things like that. That has been something that at least I’ve personally found over the years where, people, let’s say they leave it at their old job site, it’s just so much harder to do any type of paperwork, transactions, etc. So even if it’s just one, sometimes it can be harder in organizing it into an IRA makes a lot of sense. The second pro here is the investment options that you have inside of your account.

Anthony Saffer 1:55
That’s right, with the 401(k), you’re typically picking from a list of investment options. And that’s it, and maybe the 401(k) has good options. But let’s face it, I mean, with an IRA, it really opens up the universe to get your costs potentially lower, to expand your investment plan. And this kind of goes back to the organization part of it too if you have multiple 401(k)’s. And you’re trying to deal with multiple investment plans, as opposed to having everything consolidated in an IRA, maybe you impose a tactical strategy with that makes it much easier.

Alex Okugawa 2:26
The third thing here, and it’s kind of like investments, there’s cost to investments. The third thing here is lower costs.

Anthony Saffer 2:32
You can get things really low, if you want to, if you want to go with the cheapest ETF and index funds out there in an IRA, this may be a much better option than a 401(k), which could have high cost funds. Even if the funds have relatively low cost. Sometimes there can be other administrative fees that are part of the 401(k). Many times they’re hidden. If you do really need to dig into those costs, you need to get the summary plan description of the 401(k) and really find out what you’re paying.

Alex Okugawa 2:59
Yeah, the thing is, you’re likely going to pay some fees on the 401(k) side, it’s not necessarily about are you paying fees, it’s what are you getting for the fee that you’re paying, right? So, if I’m going to pay fees on my 401k, but I’m not really like getting any advice or any benefit from it, there’s probably not a fee that I feel like I should be paying or I’m getting any value from I mean, we charge fees for the advice that we provide. But for the fee that we charge, we do comprehensive investment management, financial planning, tax planning, retirement planning, cash flow estate, the whole gamut. And so again, it’s not just about the fee, it’s what are you getting for the fee? The fourth thing here is there’s no, what are called qualified charitable distributions, from an account like a 401(k).

Anthony Saffer 3:42
Yeah, those QCD’s, we’ve talked about that strategy quite a bit. Because when tax reform happened in 2018, far fewer people are getting a tax benefits from their charitable distributions. So, once you get over 70 and a half, giving directly from your IRA to charity is a huge tax advantage most of the time, you can’t do that in a 401(k) you can from an IRA.

Alex Okugawa 4:03
Yeah really is one of the most tax advantageous ways to give. The last pro here and then we’ll start moving on to the cons is, you need to think about if you have employer stock in your 401(k) plan.

Anthony Saffer 4:15
Yeah, that’s a strategy called net unrealized appreciation. Basically says if you have employer stock in your 401(k), you can evaluate it, it can make sense to distribute that outside of the rollover, but you can’t pick and choose you can’t just distribute the stock, implement this strategy and keep the rest in your 401(k).

Alex Okugawa 4:33
NUA strategy or net unrealized appreciation. I mean, that’s a pretty complex strategy. So, definitely consult with your financial advisor or tax pro before you consider anything like that. But for some people, it can make a lot of sense and save huge tax dollars. Okay, let’s move on to the cons here. We have three quick ones. The first thing here is premature distributions.

Anthony Saffer 4:54
I probably see this as the biggest reason to stay in a 401(k) if they’re in an age window of age 55 to 59 1/2. And here’s the reason why is because taking out of an IRA prior to 59 and a half will produce a premature withdrawal penalty. However, in a 401(k), as long as you retire or leave the job in the calendar year that you turn 55, you can withdraw early. So that window is between 55 and 59 1/2. Now, you can’t leave a job at 53 and then hold on to the 401(k) until you get to 55. That doesn’t work.

Alex Okugawa 5:30
That’s a common misconception, right? People go well, I retired, you know, 53, I didn’t get a new job. And I still have my employer plan. They’re still kind of taking the money out? And the answer is, no, at least that’s the way the current law stands. So let’s move into the second con here, which is creditor protection. Why wouldn’t you not want to rollover your 401(k) into an IRA?

Anthony Saffer 5:51
Yeah, so 401(k)’s have federal credit protection from bankruptcy and other things. IRAs are governed by the states basically, and states have different rules around that, there is still usually some level of creditor protection, it just may not be quite as comprehensive. Now, we usually recommend to our clients in addition to having really solid homeowners insurance, auto insurance is also to have an umbrella policy, which you can get pretty cheap to get good solid coverage. And this can help alleviate some of that concern.

Alex Okugawa 6:22
And the third and final con here, why you would consider not rolling over into an IRA is you can’t delay RMDs if you’re still working.

Anthony Saffer 6:31
Yeah, so leaving your money in a 401(k) If you’re still working that way, you can push back your RMD. Now we talked about that before, that’s not always the best thing is just to wait and then you have this really high distribution later on. But you can eventually leave it in there for quite a while if you want to.

Alex Okugawa 6:50
Yeah, one of the big topics in this video is discussing required minimum distributions and we’ve previously posted a video on the updated changes to RMD ages, folks can watch that video above. Once again, this is Alex Okugawa at One Degree Advisors, and if you’d like to learn how we can help you with your retirement, visit our website at onedegreeadvisors.com/getstarted/

Transcribed by https://otter.ai

The One Degree Blog

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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures

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