To Roll Or Not To Roll? Stay In Your 401(k) Or Roll to an IRA?

Share Article

Paul R. Streiber, M.B.A., CFP®, discusses some of the options in deciding whether to roll your 401(k)

“A very important issue that is often overlooked is the preferential distribution options that IRAs offer,” says Paul Streiber.

Millions of Americans now have access to 401(k) plans or similar retirement savings plans through their employer, notes Paul R. Streiber, M.B.A., CFP®, financial planner and wealth manager, with Heritage Financial Planning (http://www.HeritageFinancialPlanning.com) in Dallas, Texas.

In a changing and difficult job market, it’s likely many of these individuals will eventually face a difficult decision – and may face it more than once over the course of a career: should you roll your 401(k) account to an individual retirement account (IRA) after changing jobs, being laid off or retiring?

Of course, there are compelling arguments for each side.

One significant point in favor of rolling your 401(k) is that it’s likely you will have greater investment options with an IRA. Leaving your retirement money with your previous employers’ plan limits the investment options you have to those available in the employer’s 401(k) plan. While most plans offer a number of investment choices, customizing an investment portfolio and building a well diversified portfolio that suits your goals and objectives may be hampered by the lack of appropriate alternatives in the 401(k) plan.

“A very important issue that is often overlooked is the preferential distribution options that IRAs offer,” says Paul Streiber.

Typically, a 401(k) plan will allow you to name a beneficiary in addition to or in place of a spouse. Should you pass away with the money in a 401(k) plan, these non-spouse beneficiaries will typically be forced to withdraw all funds from the 401(k) plan at once or over a limited number of years. Since any money received from a forced distribution from the 401(k) will be considered taxable income to the beneficiary, the beneficiary may find themselves unwittingly in a much higher tax bracket as a result of their inheritance. Forced distribution, resulting in dollars being pushed out of a tax-deferred plan, also means that any future income or capital gains on distributed funds will be fully taxable.

Instead of forcing an immediate distribution from the plan, an IRA allows a non-spouse beneficiary to take distributions over their lifetime. For a younger child or even grandchild, the continued tax-deferred growth and tax savings can make a tremendous impact on how long these assets can be preserved.

Also, if suitable for you and your situation, an IRA may be converted to a Roth IRA, which has its own set of advantages.

While it’s often advantageous to roll the 401(k) into an IRA, there are a couple potential drawbacks.

First, your new employer may allow you to roll your old 401(k) into their 401(k) plan and your new 401(k) may allow you to borrow money out of your account, which is not allowed in an IRA.

Also, though there can be hidden (and high) costs associated with 401(k) plans, if you roll your 401(k) into a registered representative or commissioned broker model, you may find higher costs associated with investment options in an IRA. A $200,000 401(k) balance rolled over to commissioned mutual funds could result in sales commissions in excess of $7,000. Annuities and other life insurance products, which can also be used in rolling over a 401(k), often carry an even higher commission rate but are often not as transparent as the mutual fund commissions.

Rolling your retirement plan balance to an IRA is almost always advantageous, but be aware of the flexibility that you may lose in the process. Perhaps most importantly, make sure that the cost of your choice is reasonable.

Paul R. Streiber, M.B.A., CFP®, is a financial planner and wealth manager with Heritage Financial Planning, serving a select group of clients who require objective, fee-only comprehensive financial planning and wealth management, including retirement planning, investment management, estate planning, education planning and risk management. Paul Streiber’s professional experience includes many years in various aspects of financial services, including personal finance, banking, and corporate finance. Prior to passing the 10-hour, two-day long CFP® certification examination, Paul Streiber earned a Certificate in Financial Planning from the University of North Texas, a M.B.A. in Finance from the Simon Graduate School of Business at the University of Rochester and a B.A. in Economics from Drew University.

About Heritage Financial Planning
Heritage Financial Planning is a fee-only comprehensive financial planning and wealth management firm known for putting its clients first and helping them understand their current financial positions and the steps necessary to meet their goals and objectives. Heritage Financial Planning serves a select group of clients who require objective, fee-only comprehensive financial planning and wealth management, including retirement planning, investment management, estate planning, education planning and risk management. Heritage Financial Planning was founded in 2004 by Steve Blankenship, CFP®, a nationally recognized financial planner, who has helped high net worth individuals in the DFW Metroplex and across the U.S. achieve personal financial goals and objectives for more than 15 years. Heritage Financial Planning is online at http://www.HeritageFinancialPlanning.com.

About CFP Board
The mission of Certified Financial Planner Board of Standards, Inc. is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for personal financial planning. The Board of Directors, in furthering CFP Board's mission, acts on behalf of the public, CFP® professionals and other stakeholders. CFP Board owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. CFP Board currently authorizes more than 63,000 individuals to use these marks in the U.S.

Contact:    Paul R. Streiber
    Heritage Financial Planning
    (817) 410-5725
    paul(at)heritagefinancialplanning(dot)com

###

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Paul Streiber