The Importance of Rolling Over Old 401(k)s into IRAs
Investing budgeting Dave Ramsey Roth IRA 401k 403b savings1. Tax Benefits and Continued Growth
When you change jobs, one of the best options for handling your old 401(k) plan is to perform a rollover to an Individual Retirement Account (IRA). Here’s why:
Tax Advantages: By rolling over your 401(k) money into an IRA, you avoid immediate taxes. Your retirement savings continue to grow tax-deferred, allowing you to maximize your investment returns over time.
More Investment Choices: Most 401(k) plans have limited investment options pre-selected by the employer and the financial provider. In contrast, IRAs offer a near-infinite variety of investment plans. You can choose from individual stocks, bonds, ETFs, and more. Plus, you have the flexibility to buy and sell holdings whenever you want.
2. Better Communication and Control
Improved Communication: Leaving your account with your old employer might result in communication challenges. News and updates are typically distributed through company email, and getting in touch with advisors or administrators can be cumbersome. By rolling over to an IRA, you maintain better communication channels.
Enhanced Control: An IRA gives you more control over your portfolio. You can personalize your investment choices and stay informed about changes. Unlike 401(k) plans, which often limit rebalancing frequency, IRAs allow you to adjust your holdings as needed.
3. Lower Fees and Costs
Reduced Fees: Rolling your money into an IRA can significantly lower management and administrative fees. These fees can eat into your investment returns over time, so minimizing them is essential for long-term growth.
4. Potential Roth IRA Options
Tax Diversification: If you’re considering a Roth IRA, rolling over Roth 401(k) funds into a Roth IRA provides tax diversification. Roth IRAs allow tax-free withdrawals in retirement, offering flexibility in managing your tax liability.
5. Beneficiary Considerations
Better for Beneficiaries: IRAs often have clearer rules and more straightforward processes for beneficiaries. In the unfortunate event of your passing, your heirs will appreciate the simplicity and ease of handling inherited IRAs.
In summary, rolling over old 401(k)s into IRAs offers more investment choices, better communication, lower fees, and greater control. As a CFP, I recommend exploring this option to optimize your retirement savings strategy.