If you have decided to change jobs, you have several different options when it comes to your 401(k) plan. Of the four options available, one of the best is to simply roll this over into an IRA. You could cash out your entire 401(k) plan and pay the taxes, along with the penalty for early withdrawal, or you could simply leave it with your ex-employer or transfer it to a new 401(k) if that is an option. For most people, simply rolling over your 401(k) plan makes everything easier, and you can do the same if you have a 403B instead. This article explains what you need to do.
Convert Your 401k Into a Precious Metals IRA
Gold and silver have been used as a store of value for thousands of years. Especially in today’s inflationary environment it is important to have a percentage of your assets in precious metals. This is easy to with a self-directed IRA that can hold physical precious metals. These types of accounts can be a bit complicated to set up so you should read this 401k to gold IRA rollover guide to start your learning process.
More Investment Choices
When you have a 401(k) plan, you have somewhat limited choices regarding this investment. In those cases, it is using mutual funds to generate the funding. However, if you do have an IRA, it’s not possible to simply invest it wherever you want to. Additionally, there are many other types of investments that you can choose from outside of mutual funds which will include exchange-traded funds, bonds, and stocks
Selling your holdings at any time is also an option, along with buying additional holdings. In most cases, your 401(k) will limit how many times you can adjust your portfolio, or they may restrict you to only doing this at certain times of the year.
Better Communication
If you are going to leave your existing 401(k) plan with your prior employer, you may discover that you are treated much like a second-class citizen, yet this is not deliberate. It’s just going to be more difficult to communicate with the people that your worksite and connecting with an administrator or advisor could be problematic. If you want to have access to this information if something does go wrong, you must connect with your old workplace.
Most of the 401(k) plans have specific rules that state if you have less than $1000 in your account, your employer will be able to cash it out and provide you with -20% tax withholding. If you have as much as $5000, then your employer can move this into an IRA.
Lower Fees and Costs
If you’re going to roll your money over into an IRA as mentioned, this tends to make it easier when it comes to administrative fees management aspects of having an individual retirement account which will be a good return on investment over time. Many of the funds that are connected to your 401(k) plan may be much more expensive than their asset class. Additionally, the overall annual fee must continually be paid.
If you have millions of dollars to invest, and you have a larger 401(k) plan, you will likely have access to what is called an institutional class funding account that will charge much lower fees. Keep in mind that your IRA is never going to be free of every possible fee. However, you are simply going to have more choices and control when you are investing more money such as when you can invest, what you will pay, and how you can invest funding.
The Option to Convert to a Roth
When you do an IRA rollover, switching to a Roth account might be the best option for you. Many of the Roth 401(k) plans are rollover into a Roth IRA. When you have one of these, the taxes must be paid on the money you are contributing the moment that you place this into your account, but you will not have to pay any taxes when you withdraw the money which is completely different from a regular IRA. You are also not bound by rules that have required minimum distributions, such as at the age of 72, and you will not experience this with a Roth IRA.2
For those that will soon be in a much higher tax bracket, or if you are predicting that tax rates are going to be higher the year that you will need to access your IRA money, you may want to switch over to a Roth account, simply pay your taxes now, and benefit financially in the future.
For those that are currently under the age of 59 1/2, you can easily withdraw funds from a Roth IRA, especially in comparison to a standard IRA. Most people will not encounter withdrawal penalties for any of their contributions, however, you will need to pay penalties if you are extracting any of your investment earnings.5
When looking at some 401(k) plans, you may have rules that only permit a rollover that will place your money in an IRA. If that is the case, you must do that initially, and then convert the IRA into a Roth subsequently. There are certain strategies that you can use for determining how and when to do this so that you can minimize your overall tax burden. If the market is currently experiencing a significant downturn, going back to an IRA, if you convert 20% or more of this into a Roth account, you are not liable for paying more taxes when you converted. If you are simply going to hold onto your funds as they are recovering, this might be the best strategy for you.
However, writing this out could be very tricky and you could lose a substantial amount of money which is why it is a good idea to work with your financial advisor.
Cash or Other Incentives
There will always be additional financial institutions that will be eager to work with you. They may try to entice you to bring all of your retirement money to them, but in the process of doing so, throw some of your cash away. An example of this is from 2021 when the company was offering bonuses that were as high as thousands of dollars if you decided to work with them when rolling over your 401(k) into an IRA.6 If it’s not money, then they may also provide you with trades or free as part of your package for switching over.
Clearer and Fewer Rules
Understanding your 401(k)’s rules is very important, but it’s very difficult to do because many employers have a lot of leeway regarding how they decide to set this up. In contrast to this, IRA regulations are standardized by the IRS. Therefore, an IRA at any financial institution is going to follow the same rules.
There is an often-overlooked variation when looking at IRAs and 401(k)s regarding taxes that must be paid to the IRS. For example, the IRS is going to require 20% of distributions from any 401(k) to be withheld so that taxes can be paid.7 If you decide to distribute your IRA, you can then opt for no tax withheld.1
For some people, it would be a wiser decision to withhold taxes than to have to pay a large bill at the end of the year which may include penalties for underpayment or owing interest on unpaid balances. If you choose to withhold money, preferably more than you will owe, this could be beneficial far above the automatic 20% that is usually taken out. The primary benefit of doing so is that you are not going to completely deplete your retirement account too quickly, plus you are allowing that money to compound on a tax-deferred basis.
To Sum it Up
Many people that are switching jobs may want to take advantage of the process of rolling over their 401(k) into an IRA. However, it is advantageous to shop around and look at the many different IRA providers that may have the lowest possible expenses. This can be a substantial difference with how much money you will have at your disposal once you reach retirement age.