3545: 4 Reasons You Should Rollover Your 401(k) Into an IRA by Jeff Rose of Good Financial Cents on Smarter Retirement Planning

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[00:00:30] This is Optimal Finance Daily. 4 Reasons You Should Roll Over Your 401k Into an IRA by Jeff Rose of GoodFinancialCents.com Transitioning from one job to another often leaves employees with the crucial decision of managing their 401k plans.

[00:00:48] This article delves into four compelling reasons why rolling over your 401k into an individual retirement account, an IRA, could be a beneficial move. Offering a buffet of investment options, simplifying financial management, gaining control over retirement income, and more discretion over required minimum distributions. Today, I'll answer a common question I get from a lot of people. It goes something like this. You're working somewhere.

[00:01:18] You're working somewhere, and you change jobs. Maybe you decided to go somewhere else. You were laid off, or you were fired. Whatever the reason, if you've been there for a while, you most likely participated in the 401k plan. Now that you've left that job and you've started your new job, you have to make a very, very important decision on what to do with that 401k. The common question I get is this. Jeff, I've got an old 401k. Does it make sense to roll it over into an IRA?

[00:01:46] Depending on your situation, most likely I will say yes. But there are some instances where it could make sense to roll it into your existing 401k, which I'll address at another time. Today, I want to make the case why you should at least consider rolling over your 401k into an IRA. Number one, more investment options. First and foremost, you want more investment choices.

[00:02:11] Most commonly, what I see in most 401k plans, you're going to have approximately 12 to 15 investment choices to choose from. I've seen some bigger plans that are going to have 40, 50, or maybe even 60 investment choices. But generally, this is what I see. If you take that money and roll it over into an IRA, instead of just having those 12 to 15 investment choices, now you just opened up the world of all the different investment options that you have.

[00:02:39] If you want to invest into individual stocks, you can do so in an IRA. Most likely, you weren't allowed to do that in your 401k. That also applies to other investments that you'll be able to invest in now too. Number two, simplify your life. What about the simplification of your life by the consolidation of paper and account statements? I can remember one particular case where my client had seven different 401k plans.

[00:03:08] Imagine getting seven different quarterly statements and trying to sort through it. Not only that, but also try to keep track of the investment strategy of what's going on with those seven different 401k accounts. By rolling it all over to an IRA, you're able to consolidate into this one account. If you change jobs several times, why not consider consolidating and simplifying your life? I'm all about less paperwork.

[00:03:33] Less paperwork equals more efficiency and it's easier to keep track of what's going on in your financial life. Number three, control your income. Another aspect to consider, especially if you're approaching retirement, is being able to control your retirement income. Typically, when you take a distribution from a 401k plan, they're going to withhold the standard 20% tax withholdings.

[00:03:57] Once you roll over to an IRA, you have some discretion as far as how much taxes you want to be withheld from your distributions. When it comes to retirement planning and income planning, the less that you have to pay up front to Uncle Sam, the better. Now, in the first year of retirement, it's a little bit harder to determine what the exact tax may be. But typically, after I've been working with a client for a year or so, we can kind of gauge how much taxes we need to withhold from our distributions

[00:04:25] to make sure that we have taken enough out for the end of the year. And number four, RMDs. Another consideration is regarding distributions from IRAs, especially if you're approaching age 72. Once you hit age 73, you have to start what's called required minimum distributions. Within the IRA, now you have discretion as far as what investments you want to liquidate or remove from the IRA.

[00:04:52] Maybe there's something that's not performing and you'd like to take that or liquidate it out of the IRA. With the 401k and those limited investment choices, you're not going to have as much say on what gets liquidated. Those are quickly just four reasons why I think you should consider rolling over your 401k into an IRA. Once again, going back to point number one, having more investment choices, to me, is the biggest reason why you should do this. I compare it to going out to eat.

[00:05:22] I can go to a restaurant that has five things or I can go to a 65-item buffet. Anytime I have more choices, generally I'm going to be happier because depending on what mood I'm in or what's going on, I'll have more options to choose from. The bottom line, four reasons you should roll over your 401k into an IRA. The transition from one job to another often brings the dilemma of managing old 401k plans to the forefront.

[00:05:48] The discussed insights accentuate the merits of rolling over a 401k into an IRA, which notably include a broader spectrum of investment choices, simplified financial management, controlled retirement income, and nuanced handling of required minimum distributions post-retirement. You just listened to the post titled,

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[00:08:07] I've always rolled over my 401k when I changed jobs. While my corporate career lasted about 13 years, I actually only changed jobs twice where this came into play. The first time, I was around 25 years old. I rolled my 401k from my old employer into the 401k with my new employer. It would have been more optimal to roll it over into a traditional IRA.

[00:08:31] But at the time, I knew nothing about IRAs, and I hadn't even started investing in a Roth IRA yet. However, I did know enough to contribute the minimum percentage required to get my full company match on my 401k. And I was lazy enough to not want to keep track of multiple accounts. So a rollover into my new 401k sounded great. The second time I did this was in 2021 when I retired from my corporate career.

[00:08:59] I rolled my 401k into my traditional IRA. I did so for all the reasons described in this article. But one reason I didn't see mentioned are fees. When you have a company match in a 401k, I think the benefit of that match outweighs the higher fees associated with this kind of account. But without the match, the fees just make leaving it there suboptimal.

[00:09:25] Roll it into a traditional IRA, which likely has better options for low-fee total market index funds anyway. But that should do it for today. Thank you for listening. Have a great rest of your day. And I'll see you on tomorrow's show, where your optimal life awaits.