Top 9 Benefits of Rolling Over Retirement Savings to an IRA After Job Change or Retirement
When you retire or leave your job, a key financial decision is what to do with your employer-sponsored retirement plan—like a 401(k), 403(b), or 457 plan. These plans are excellent for saving during your working years, but they’re not the best long-term option for your retirement funds. Rolling over your plan into an Individual Retirement Account (IRA) is often the smartest choice. In this article, we’ll discuss why rolling over your retirement plan into an IRA can be a savvy financial move.
1. More Investment Options
One of the most compelling reasons to roll over your employer-sponsored retirement plan to an IRA is the broader range of investment options. Most 401(k), 403(b), and 457 plans offer a limited selection of investment options, typically mutual funds or exchange-traded funds (ETFs) that are pre-selected by the plan administrator.
With an IRA, you can invest in individual stocks, bonds, real estate investment trusts (REITs), options, commodities, and even alternative assets such as cryptocurrency. Self-directed IRAs offer many unique investment opportunities. This wider array of choices allows you to create a more diversified and personalized investment portfolio tailored to your financial goals, risk tolerance, and time horizon.
In addition, employer-sponsored plans often have limited and sometimes underperforming investment options. An IRA gives you access to the best-performing funds and lower-cost options. This level of flexibility and control is crucial, especially in the later stages of retirement when optimizing portfolio performance becomes essential.
2. Lower Fees and Expenses
Fees can eat away at your retirement savings over time. Many employer-sponsored plans come with administrative fees, management fees, and expense ratios tied to the investment options within the plan. Participants are often unaware of the full scope of fees associated with their plans.
Many brokerage firms offer IRAs with no annual fees and access to low-cost funds like index funds and ETFs with minimal expense ratios. Over time, lower fees can have a significant impact on your retirement savings, as more of your money stays invested and grows through compounding.
3. Simplified Account Management
When you have multiple employer-sponsored retirement plans, especially if you’ve changed jobs several times, keeping track of each account can become cumbersome. Every plan has different rules, fees, and investment options. It can be a challenge to stay organized and ensure your investments are working in your favor.
In addition, it is common for employers to move their retirement plan to different vendors. This can create communication and administration issues if your previous employer does not have your correct email and address information.
Consolidating retirement funds into a single IRA simplifies your account management. Instead of multiple accounts, you’ll have one. This makes it easier to monitor your investments, make informed decisions, and focus on your retirement goals.
4. Potential Account Loss
One of the most daunting situations for former employees is when their previous employer closes, is sold, or undergoes a merger. These scenarios are increasingly common in today’s corporate landscape. While the Department of Labor safeguards your retirement account, locating your funds can be complicated.
Employer plan administrators are not always diligent in reaching out to you, especially if you haven’t worked there in years. Many individuals discover the termination of their employer’s retirement plan only when they receive a notification from the Social Security Administration long after the fact. This can make accessing your retirement funds incredibly difficult.
You can consult the Department of Labor’s abandoned retirement plans database, but this option does not guarantee that you’ll be able to find your lost funds. Understanding these challenges can help you take proactive steps to secure your retirement savings.
5. Avoid Tax Penalties and Cash-Out Temptations
When you leave your employer, cashing out your 401(k), 403(b), or 457 plan might be a tempting option, especially if you’re facing immediate financial needs. However, this move can have serious tax consequences. Distributions from these plans are subject to income tax. If you are younger than 59½, you’ll likely face a 10% early withdrawal penalty. Rolling over your funds into an IRA avoids these penalties.
In a direct rollover, your funds move seamlessly from your 401(k), 403(b), or 457 plan into an IRA without incurring any taxes or penalties. This keeps your retirement savings intact and continues the tax-deferred growth that is essential for long-term financial security.
6. Better Estate Planning Options
IRAs offer more flexibility when it comes to estate planning. If you leave your 401(k) or 403(b) with your former employer, your beneficiaries may face restrictions on how they can inherit the funds. With an IRA, you have more control over how and when your beneficiaries will receive the funds upon your passing.
For example, with a traditional IRA, your spouse can roll the funds into their own IRA, allowing them to continue tax-deferred growth. Non-spouse beneficiaries also benefit from specific distribution rules that may allow them to stretch withdrawals over their lifetime, minimizing taxes. These options are often more favorable than the rigid distribution rules associated with employer-sponsored plans.
7. Required Minimum Distributions (RMDs) Flexibility
Once you reach age 73, you are required to take Required Minimum Distributions (RMDs) from your retirement accounts, whether it’s a 401(k), 403(b), or IRA. However, if you still have multiple retirement accounts, calculating and managing RMDs can become complex, as each account may have different rules and calculations.
By consolidating your retirement accounts into one IRA, you streamline the RMD process. You’ll only have to calculate RMDs from a single account, making it easier to manage your withdrawals and ensuring that you meet IRS requirements without incurring penalties for failing to take sufficient distributions.
In addition, while some employer plans may not allow partial withdrawals, an IRA typically gives you more flexibility with how and when you take your RMDs. This flexibility allows for better tax planning and ensures that you can manage your withdrawals in a way that fits your financial needs and goals.
8. Flexibility in Withdrawal Options
Employer-sponsored plans often have restrictive withdrawal options. Some plans may limit how frequently you can take distributions or impose rules on the size of your withdrawals. Others might only offer lump-sum distributions, which could push you into a higher tax bracket and create an unexpected tax burden.
In contrast, IRAs offer greater flexibility when it comes to withdrawals. You can take out as much or as little as you want, when you want it, as long as you meet the RMD requirements after age 73. This flexibility allows you to create a withdrawal strategy that aligns with your tax situation, income needs, and overall retirement plan.
9. Access to Professional Guidance
Rolling over your retirement funds into an IRA also opens the door to professional investment advice. While some employer-sponsored plans offer limited financial guidance, many IRA providers give account holders access to personalized advice from financial planners or investment specialists. This guidance can be invaluable as you navigate the complexities of retirement income planning, investment management, and tax strategies.
A Vital Step
When you retire or leave your job, rolling over your 401(k), 403(b), or 457 plan into an IRA is a vital step for optimizing your retirement savings. This transition offers numerous advantages, including greater control over your investments, lower fees, streamlined account management, and enhanced tax and estate planning options.
Taking the time to evaluate your options is essential for making informed decisions that can lead to a more secure and financially flexible retirement. Always consult with a financial advisor or tax professional to understand the specific implications of a rollover tailored to your unique situation and retirement goals. Don’t leave your future to chance—make the switch today for a more prosperous tomorrow!