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Jerry Yu
Jerry Yu has over 20 years of experience, establishing Reign Financial and Insurance in 2000. He is focused on helping clients save income tax, asset protection and wealth transfer. Jerry is also a member of the Million Dollar Round Table, Top of Table. Website: reignfinancialservices.us

Office: (626) 890-0090 | Reign Financial & Insurance Services

Is Now The Time To Consider Rolling Your 401k Over Into An IRA?

June 23, 2022/in Retirement Planning/by Jerry Yu

“If you have 401k, your investment choices are limited. Depending on your situation, an IRA could be a better choice.” Jerry Yu

Many people at or near retirement age have money in 401k plans, and the number of people participating in those plans has increased over the last few years.

401ks have numerous benefits and are a critical part of a person’s retirement plan. However, 401ks have a few shortcomings that may make them problematic for some seniors.  These plans may also pose issues for people who’ve changed jobs but decided to leave their 401k with that employer. If you fall into one of these categories, you may benefit by doing what’s known as a 401k “rollover” into an IRA.

Here are a few reasons that a person leaving their current employer might want to consider doing a 401k to an IRA rollover.

  • You’ll have more diversified investment options. In such a volatile and unpredictable market as we are currently experiencing, diversity in your portfolio is a must. 401ks, with their limited menu of fund choices, don’t allow you to diversify and spread the risk around. With an IRA, nearly any type of investment is permitted, including stocks, bonds, mutual funds, annuities, exchange-traded funds (ETFs), real estate, and precious metals. Diversifying is much easier with such a wide array of assets from which to choose.
  • You may have lower fees and expenses. A rollover often results in significantly lower administrative fees and other costs. For instance, some funds chosen for 401k plans may be inherently more expensive than the norm for their particular asset class. Then there is an annual fee that the managing institution of your 401k charges. While it’s true that IRAs also have fees, they are often much less than those of company-sponsored plans.
  • You can convert to a Roth. An IRA rollover allows you to switch to a Roth IRA. With a Roth, you pay taxes now on the money you contribute, but no tax on the money when you withdraw it at retirement age. Since taxes seem to increase nearly every year, paying them now makes a lot of sense.
  • IRAs are standardized. Because employers have a lot of latitudes when setting up their plans, 401ks can differ significantly from employer to employer. IRAs, on the other hand, are standardized by the IRS. An IRA purchased from one financial institution is essentially the same as an IRA purchased from another.
  • Distribution rules are different. The IRS says that 20% of 401k distributions must be automatically withheld for federal taxes. When you receive a distribution from your IRA, you could elect to have no taxes taken out. The benefits of doing this are that you aren’t depleting your account as quickly, and you’re letting your money continue to grow tax-deferred. Of course, having zero taxes withheld may not be wise in your particular situation. Always consult a financial professional before taking this or any other tax-related election.

Yu’s View: For many people leaving or switching employers, rolling their 401ks over into an IRA has many advantages. However, there are some downsides and issues with a rollover that you must discuss with your retirement income specialist. Also, you want to shop around, select the product with the lowest costs, and discover the best assets to include in the IRA to ensure you achieve your money goals. Be sure to reach out to me if you’d like more information on how to do a successful rollover.

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