Leaving a job comes with many challenges, including deciding what to do with your 401(k) savings plan. You can cash it out and pay withdrawal penalty and taxes, transfer it to a new employer’s 401(k) plan, or leave it as it is if your old employer allows it. However, one of the best options is to roll the assets to an individual retirement account (IRA).
An individual retirement account (IRA) is a long-term savings plan allowing you to save money for the future while enjoying certain tax advantages. You can open an IRA through an investment company, a bank, a personal broker, or an online brokerage. An IRA has several advantages, from lower costs and fees to fewer rules and regulations. Keep reading this article to learn about the four most common benefits of a 401(K) to IRA Rollover.
1. Wider Investment Options
Most employer-backed 401(k) plans offer limited investment options, and you typically have to choose among several mutual funds from a particular financial provider of the employer’s choice. IRAs, however, offer a broader range of investment options, allowing you to choose investments that better align with your financial goals, investment preferences, and risk tolerance.
You can buy or sell holdings whenever you want or invest in individual stocks, bonds, or exchange-traded funds (ETFs). You can also invest in precious metals by rolling over your 401(k) savings plan to a precious metals IRA with financial institutions like Oxford Gold Group.
Unlike traditional IRAs that hold paper assets, precious metal IRAs have physical precious metals like gold, silver, platinum, or palladium in the form of coins or bars as an investment instead of traditional stocks and bonds. Many IRA providers also offer financial advisors and investment tools to help you make informed investment decisions and efficiently manage your retirement savings.
2. Simpler Rules
As 401(k) retirement plans are employer-sponsored, you are subject to the rules and regulations set by the employers sponsoring it. Employers typically have much leeway in setting up their plans, which means that rules for a 401(k) plan can vary from place to place, and it can be challenging to understand them. In contrast, the Internal Revenue Service (IRS) standardizes IRA regulations everywhere so that IRAs across financial institutions follow the same rules.
IRAs also typically have fewer rules. Whereas employers can set more extensive restrictions on investment options and distribution rules for a 401(k), such limits are generally fewer with an IRA. You also have greater control over the amount the IRS can withhold as tax from an IRA (with the option to pay the rest later), whereas for a 401(k), the IRS has set the amount at an unchangeable 20%.
3. Potential for Conversion to Roth IRA
Traditional 401(k) plans typically permit only a traditional IRA rollover. If you want a Roth IRA, you’ll need a traditional IRA first. In a Roth IRA, you only pay taxes in the years you contribute the money, and no tax is due upon withdrawal. If you expect to be in a higher tax bracket by the time you retire or believe the taxation percentage will be higher by the time you require your savings, then rolling over to a Roth IRA and paying the tax now can help provide tax benefits in retirement.
You don’t have to withdraw required minimum distributions (RMDs) starting at age 73 from a Roth IRA as you’ve already paid the income taxes due. It’s also much easier to withdraw funds from a Roth IRA than a traditional one if you are younger than 59½ years, as there typically aren’t any fines for early withdrawal.
4. Lower Costs and Fees
Rolling your money to an IRA can lead to significant savings over time. The funds offered by the 401(k) plan are typically more expensive than the norm for their asset class, and there is also an additional annual fee that the financial institution managing the plan charges. IRA providers have much lower fees and costs in comparison.
There are numerous IRA providers, so they must compete with each other on fees, helping keep fees low for investors. They also have lower administrative and management costs. These reasons help IRAs be a more cost-effective option compared to a 401(k) savings plan.
How to Roll Over Your 401(K) to an IRA
There are three ways to rollover to an IRA from a 401(k) savings plan. You can rollover from:
a traditional 401(k) to a traditional IRA
a Roth 401(k) to a Roth IRA
A direct rollover from the financial institution holding your 401(k) plan to the one managing your IRA is typically the safest and easiest way. However, you can also roll over the money indirectly by taking possession of the money yourself. Normally, you will have 60 days to roll over the amount to an IRA. The financial institution will consider the distribution as a withdrawal, and you will be subject to taxes, which is why this option is riskier.
Rolling over your 401(k) savings plan’s assets to an individual retirement account (IRA) can be one of the best options for individuals who leave a job. Not only do IRAs offer wider investment options, but the rules and regulations are also much simpler and standardized, and an IRA is a much more cost-effective option. Overall, IRAs can be a more flexible and less restrictive retirement savings option than 401(k) plans. Before considering an IRA, you must consult your financial advisor, as they can help you choose the right Roth IRA provider and investment options for your needs.