Our Clients Are Rolling Over Their Old 401ks Into IRA’s. Here’s Why.
You left your last job, and you’re about to tackle new challenges at a new company. As you pack up your desk and get settled in a new role, you may be wondering what happens to your old company-sponsored 401(k).
Well, you could let the money just sit there. Or you could roll your 401(k) funds into an IRA. There are several benefits for doing so.
Advantage: You have More Options For Investments.
When you roll your company’s old 401(k) funds into an IRA, you open yourself up to many more investment choices. Your company-sponsored 401(k) has limited investment options—usually mutual funds from only a few providers—whereas an IRA can let you choose from individual stocks, bonds, and exchange traded funds (ETFs) too.
An IRA also allows you to be able to buy and sell holdings at any time and as often as you’d like. However, if you keep your funds in your old 401(k), you’re most likely restricted to buying and selling just a few times a year.
Advantage: A Financial Planner Can Manage Your Assets.
Your hard-earned money can do even more for you, especially if it’s not just sitting in an old account. If you roll over your old 401(k) into an IRA, you can work with a financial advisor to have the funds professionally managed. This means you’ll get personalized recommendations for which areas to invest in, when to buy and sell, and much more.
On the other hand, if you keep your old 401(k) open, it may be harder to manage changes. It may even be difficult to get in touch with a plan administrator and distribute funds in an emergency.
Advantage: It’s Easier To Track Your Money.
If you’re like most people, you’ve jumped between a few companies. According to the U.S. Bureau of Labor Statistics, the average person holds 12.4 different jobs between ages 18 and 54. Not all of your jobs will offer a company-sponsored 401(k)s, but chances are, several do. When you switch companies, you could be left with 3 or 4 (or more) old 401(k)s just sitting there, not growing to their fullest potential.
Most likely you will be signing into 3 or 4 different websites to make changes and view progress. It could be time-consuming and a complete hassle. Chances are, you won’t be as in-tune with your investments as you should be.
However, when you roll over old accounts into one IRA, it’s much easier to track your assets. Even better, if a financial advisor manages your portfolio, you’ll receive streamlined recommendations and communication about your assets.
Are There Any Disadvantages To Rolling Your Old Accounts Into An IRA?
Even though we believe the benefits of rolling old 401(k)s into a consolidated IRA outweigh any disadvantages, we need to cover both the pros and cons. There are a few potential drawbacks that you should consider before consolidating accounts.
Here’s what you should know:
- It could be more costly. Depending on your old plan’s fees and expense ratios, you may experience higher costs when you move funds into a rollover IRA. Remember, with any fees, find out what you are paying for. Does the fee cover professional management, financial planning, or something else?
- It may be difficult to convert funds to a Roth. When you combine funds, it may open you up to the IRS’s “Aggregation Rule.” This means that, for tax purposes, all IRA accounts (except Roth IRAs) are treated as one large account. Normally, this isn’t a big deal, except if you’d like to convert your Traditional IRA to a Roth IRA sometime down the road. Your best bet is to talk to a financial advisor or accountant before consolidating. A professional can help you understand any tax implications and avoid a tax surprise later.
- You lose ERISA protections. Company-sponsored 401(k) accounts are protected by The Employee Retirement Income Security Act of 1974 (ERISA). This important federal law puts minimum standards in place for retirement plans in the private industry. The goal is to protect employees who use company-sponsored plans from mismanagement and abuse. Keep in mind, if you move your old 401(k)s, you’ll lose protection from ERISA.
The beginning of a new year is the perfect time to get organized financially. Consider the benefits and drawback of consolidating your old 401(k)s. Most likely, it’s worthwhile to combine your old accounts.
If you have questions about the implications of consolidating old 401(k)s, reach out. We’re here to help you meet your financial goals.
Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).
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