March 1, 2012
Wesley from Williamsburg, VA:
I’m 61 years old, but still planning on working another 5 years. Should I roll my current 401k into an IRA or leave it where it is?
Friedenthal Financial:
It’s a very good question. As usual, the answer depends on a few factors, which we’ll outline below.
Since you are over 59 ½, you likely have the ability to roll your current 401k in to an IRA Rollover, without compromising your ability to keep contributing to your current employer’s 401k. Most plans allow rollovers for those over 59 ½, but you will want to confirm with your Human Resources Department. (If this is a previous employer’s 401k, you could do a Rollover even if you are under 59 ½… just make sure you don’t “withdraw” or take a “distribution” of funds, as there is an IRS penalty if you are under age, and tax consequences even if you are over age!) It is NOT generally advisable to roll over a plan IF that decision would prohibit you from continuing to contribute to the plan, or reduced what your employer contributed to the plan. Again, please ask your HR department for those details.
401k plans can vary materially from one another. The three biggest reasons that most people choose to roll their assets out of the 401k and in to an IRA Rollover are as follows.
1) Much broader investment selection – Your 401k plan probably has a dozen or so mutual funds from which to choose. An IRA Rollover gives you tremendous flexibility in investment selection. You may find cheaper mutual funds that are good substitutes for those in your 401k, or may choose Exchange Traded Funds as an alternative as well. You may find additional positions you wish to incorporate in to your portfolio that aren’t available choices in your 401k.
2) Lower cost fund alternatives – There are inherent costs of running a 401k plan, which includes Administration, Recordkeeping, Custody, and Investment Advisor services (fund selection, monitoring, etc.). In many plans, some or all of these costs are paid by the mutual funds, which increase their expense ratios. There are some plans where the plan sponsor (employer) may pay for some of all of those expenses directly, thus keeping the cost of the plan very low to the participants.
3) Restrictions – Many 401k plans have restrictions on when a participant can transact and how long a position must be held in their account. Investors generally appreciate that they can choose investments without these restrictions in their IRA Rollover. Note that some investments you could choose to put in your IRA may have restrictions as well (or penalties for early redemption), but at least it’s the investor’s choice.
We hope that helps and provides fodder for discussion. Please let us know if we can be of further service!
The Friedenthal Financial Team
856-210-6494 (Office)
856-210-1565 (Facsimile)
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If you know someone who would like to discuss their investment needs with us, we certainly appreciate the introduction.