Showing posts with label 401(k) withdrawals. Show all posts
Showing posts with label 401(k) withdrawals. Show all posts

Thursday, September 11, 2014

Should You Rollover Your 40l(k) into an IRA?

In the July, 2014 issue of "Money" magazine, there was an article about "the one retirement move you must get right."  What they were talking about is how you should handle the money in your company 401(k) when you decide to retire and in the years prior to retirement.  If you make the right decisions, your money will ideally last the rest of your life; if you go wrong, you could run out of funds just at the point when you are the most vulnerable.

Can You Totally Rely on the Advice of Your Current 40l(k) Provider?

It may seem natural to simply follow the advice of your 401(k) provider and allow them to handle an IRA rollover for you.  In fact, that is what approximately half of all retires do.  This works out well for the providers because rollovers are very lucrative for financial advisers, brokers, insurance agents and fund companies.  Handling an IRA is twice as profitable as running a 401(k).  As a result, your 401(k) provider has a huge incentive to encourage you to let them transfer your funds into an IRA.  However, converting to an IRA is not always the best idea for the account holder.

This is a time when many people who have contributed faithfully to a 401(k) for decades are now uncertain about the best way to convert that savings into retirement income.  The amount of money involved can be significant.  Workers over the age of 60 who have been earning over $100,000 a year had an average 401(k) balance of $414,000 in 2013.

Common Misconceptions About Converting to an IRA

The Government Accountability Office had an undercover investigator call 30 plan administrators and ask them what he should do with an old 401(k) for a former employer.  Much of the advice he was given was misleading and, in some cases, completely untrue.

In several cases, the investigator was told that he would not be able to keep an old 401(k) and must convert the money into an IRA or accept a cash payout.  In general, the truth is that you can usually keep it, as long as it is worth at least $5,000.

About one-third of the plan administrators told the undercover investigator that the funds could not be rolled over into a new employer's retirement plan.  In truth, you can almost always roll the proceeds of one retirement plan into a new one. 

Personally, I found this misconception particularly interesting because it happened to me when I worked for a California public school.  The Human Resources Department at the district office told me that I could not roll my savings from one state retirement plan into another one.  However, when I contacted the two retirement plans directly, they both told me that it was simple and completely legal to move the money into my new retirement plan and they sent me the short forms necessary to complete the transfer. 

My own experience, combined with the research in the "Money" magazine article seems to indicate that there is a lot of confusion about the process, even among people who should be knowledgeable about handling retirement savings.

The Difference in 401(k) and IRA Fees

Many large 401(k) plans have very small fees.  Once you transfer you assets into an IRA, you can expect the fees to increase, especially if you add premium services such as individualized advice.  The employees and reps for these companies have large incentives to get you to sign up for these services, since they receive substantial commissions.  Therefore, it may be wise in many cases to keep your money in your 401(k) as long as possible.  However, there are exceptions.

What Should You Do With Your 401(k)?

According to the "Money" magazine article, here are your best choices for handling your 401(k):

*  If you work for a large Fortune 500 company, keep your money in their 401(k) as long as possible.  Some companies match your deposits, so it is especially advantageous to hold onto your 401(k).

*  If you change jobs from one major firm to another one, move your savings directly from your old 401(k) into the new one.

*  On the other hand, if you are with a small company, your 401(k) may have high fees.  In addition, if the money is invested in company stock, that could be a risky choice for your retirement funds. If this is the case, it is possible that you should switch to an IRA, pay lower fees and invest the principal in an index fund.

*  Listen to the advice of your 401(k) investment manager if you want to optimize the mix of stocks and bonds in your plan.  Periodically re-balancing your account is important for your financial security.  Their advice is often offered over the phone and can help you determine the right mixture of stocks and bonds for your age, health and situation. Later, your plan administrator can help you determine how much you can withdraw each year after you retire.  Expect to pay an annual fee of 0.6% a year, or more, in addition to your regular fund fees.

*  Another choice is to buy a target-date fund in your 401(k) plan.  It will automatically adjust your portfolio so that the investments become less risky as you age.

*  If you have at least $250,000 you may wish to consult with a local investment adviser.  This is a good idea for people who like to talk with someone face-to-face.  You can hire an adviser by the hour and pay a one-time, up-front fee in the range of $800 to $1500 for the advice you need rather than spend 1% to 2% a year for the remainder of your life.

More Information To Help You Make Wise Decisions

In the next three weeks, I will also post a series of articles that cover how to choose a good investment adviser, how to use an annuity as part of your retirement income and advice for people who manage their retirement funds themselves.

If you are planning your retirement, use the tabs at the top of this page to find links to hundreds of additional articles on financial planning, where to retire, medical concerns, family relationships and more.


"The One Retirement Move You Must Get Right," Money Magazine, July 2014, page 44.

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