A Review of Reasons for 401k Rollovers


There are several reasons an individual might consider rolling over 401k assets to an individual retirement account (IRA). Visiting a qualified financial advisor can help you wade through the options and restrictions of your plan and consider alternatives.

• Consolidation of Assets – 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 might simplify the tracking of your assets and enable you to evaluate 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 enable you to meet your investment goals better as it will increase your access to a broader variety of asset classes and to different investment funds.

Your plan might also be limited to several proprietary funds and may not include top performing mutual funds. Understanding what investment options your 401k offers may be important for ascertaining your ability to build a suitable 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 expertise and oversight to perform well in a bear market than it does in a bull market. Having more investment options and a broader pool of asset classes could make the difference in preserving and growing your resources.

• Eliminate Restrictions on Selling Investments – Some 401k plans restrict the matching money in a 401k account. This is common with company stock. Participants cannot sell the company stock while it is in the 401k plan. Executing a direct rollover to an IRA when the company stock can be sent over in share form would solve the problem. Once the shares are in the IRA, you can decide on keeping or selling them. In addition, some companies limit the number of exchanges non-active employees can make. Rolling over to an IRA would eliminate these restrictions and limitations.

• Professional Guidance and Service – Let’s face it: You can get investment advice from countless sources these days. However, determining what advice to trust is difficult. Getting advice from 401k administrators may also be challenging. You can hardly expect to develop a personal relationship with anyone working for the administrator. The 401k administrator is simply a record keeper to most participants.

You may have established other investment accounts and may have developed a relationship with a financial advisor. This person knows you and your family, knows your goals and style, and is someone with whom you have built trust.

Your advisor is normally just a phone call away – not an anonymous voice at the end of a service center phone line. You know the advisor and have a sense of his/her knowledge and investment philosophy. Your advisor can also bring a holistic perspective to your financial planning since he/she understands more than just your retirement assets.

• Simplify Your Income Sources – If you have had multiple employers and/or have established an individual retirement account, you may have distributions coming from a number of places. You can simplify your distribution stream by consolidating your accounts. You can marry multiple accounts and enjoy one simple distribution by rolling your 401k assets into an IRA.

• Separation from Former Employer – Leaving a job may not be a pleasant experience. You may be forced to retire or terminated. If your departure from your former employer was not on good terms, you may wish to take your retirement assets with you. Although your 401k cannot be “touched” by your former employer, the employer still remains in charge of the plan and can change it as they deem necessary. They can change providers, alter the fee schedule, or remove investment options. The employer retains indirect control over your account and will make decisions about the plan based on objectives that do not consider your goals.

• Increase Withdrawal Flexibility in Retirement – Withdrawal flexibility varies among 401k plans. Some plans do not offer partial withdrawals for retirees. Others limit the number of withdrawals participants can take annually. On the other hand, IRAs offer unlimited withdrawal availability. Clients can withdraw money as often as they like in varying amounts. Understand, though, that these withdrawals may have taxable implications based on age. You have worked hard to save money for retirement. It makes sense to invest your money in a vehicle that provides you the flexibility to respond to your changing needs over time.

• Pro-Rata Withdrawals – When 401k clients take withdrawals, the money often comes out pro-rata. This means the money is taken out of the account in the same percentages as was invested in their 401k plan. The client is not allowed to select from which fund or funds within the plan to withdraw money. This may force you to sell investments you like, such as company stock or a favorite fund.

IRAs do not operate that way. With an IRA, you can select from which funds withdraw, which enables you to take the withdrawal in a way that is most suitable to your goals and needs.

• Customized Tax Withholding – An IRA offers other withdrawal benefits. When you withdraw from a 401k plan, the administrator is required to withhold a minimum of 20 percent for income taxes. Customers can elect a higher amount be withheld, but they cannot elect 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 only 10 percent for taxes, you can do so. Why give the IRS more than you think you will owe and give it to them months in advance?

• Improve Transfer of Resources to Non-spousal Beneficiaries – 401k plans do not transfer to non-spousal beneficiaries well. In many cases non-spousal beneficiaries have to take a lump sum distribution or take distributions over a five-year period. This does not allow non-spousal beneficiaries to “stretch” the use of this money over an extended period of time.

Any distribution would also be taxed at the non-spousal beneficiaries’ income tax bracket, which could be when the person is at the highest tax bracket they will attain. Converting your 401k to an IRA would improve the transfer of resources to a non-spousal beneficiary. An IRA allows individuals to defer withdrawals until they reach retirement and to stretch the withdrawals over their life expectancy.

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