“These days, with pensions a rarity and opportunity for salary growth often coming from a move to a new company, it is neither uncommon nor the subject of much stigma to be employed by many different firms throughout your working years,” writes Mateo Dellovo is a fine piece for investopedia.com headlined Understanding the Benefits of Rollover IRAs. “It is also not uncommon for professionals to take advantage of their employer’s 401(k) plans, often with contributions matched up to a set level. Unfortunately, many people aren’t aware of all of their options when changing employers, as this event necessitates deciding what to do with your 401(k) from the firm you are departing.”
After examining various 401 (k) options, Dellovo’s article details several potential benefits of rollover IRAs, “some not available through 401(k) plans. First, a rollover from one or more 401(k) plans into an IRA continues the deferral of taxation of your retirement contributions enjoyed when they came from your salaries at prior employers. Although you are obligated to report rollovers of this nature to the IRS, a properly executed rollover does not carry tax consequences on its own, as the funds are transferred between retirement plan custodians rather than being distributed, even if only temporarily, directly to you. If you were to elect for distribution to yourself and then put your funds into an IRA on your own, you would have 60 days from the date of withdrawal to deposit them into an IRA—although certain conditions now make you eligible for a waiver of the 60-day limit by the IRS.
“If you do opt for a distribution to yourself, this is considered an IRA transfer, not a rollover, and although the difference may seem somewhat academic, the tax consequences of each option differ significantly from one another. If your intent is to simply move funds from your old 401(k) plan or plans to an IRA, a rollover is likely to be your best option thanks to its favorable tax treatment.
“The second benefit of rolling your old 401(k) plan or plans into an IRA is the amount of money you pay in fees. 401(k) plans sponsored by employers may carry higher administrative fees than IRAs, and while fees associated with 401(k)s don’t negate your contributions outright, reducing the cost of your investment plan’s fees means more of your money goes to your retirement fund without additional contributions from you.
“Third, IRAs tend to offer many more potential choices for how to invest your money than you would have access to with a 401(k). While employer-sponsored 401(k) plans do provide a suitable number of investment options, you are only able to choose from what your company and the custodian of your 401(k) plan offer to you. A rollover IRA allows you to allocate your money in many mainstream investments, opening up a wide array of options you would not have access to via your company’s 401(k). Since balancing (and rebalancing) your portfolio to keep it in line with your goals, risk tolerance, and time horizon is a process which is likely to change in nature as you age, a rollover IRA allows you to make new choices rather than stay with the ones you made when setting up your 401(k)s at prior employers.
“The fourth benefit rolling your old 401(k) plan or plans into an IRA offers you is simplicity; instead of monitoring your investments through myriad account statements and/or online portals, a rollover IRA gives you the ability to keep tabs on your investment plan through a single statement or online tool set. This can be extremely helpful, as making future decisions about your retirement fund may involve complex calculations that only get harder when you need to analyze multiple accounts in order to see the bigger picture.
“If you are considering a new job or have recently accepted a new offer, this is a great time to take another look at your retirement planning options. Depending on your individual circumstances, rolling your old 401(k) plan or plans into an IRA may be a good choice for you.”