{"id":2411,"date":"2021-12-30T17:47:47","date_gmt":"2021-12-30T21:47:47","guid":{"rendered":"https:\/\/www.skypointfcu.com\/wph\/workarea\/?p=2411"},"modified":"2021-12-30T17:48:05","modified_gmt":"2021-12-30T21:48:05","slug":"why-a-401k-rollover-to-an-ira-could-be-a-mistake","status":"publish","type":"post","link":"https:\/\/www.skypointfcu.com\/wph\/workarea\/blog\/why-a-401k-rollover-to-an-ira-could-be-a-mistake\/","title":{"rendered":"Why a 401(k) Rollover to an IRA Could Be a Mistake"},"content":{"rendered":"\n

This article provides information for educational purposes. NerdWallet does not offer advisory or brokerage services, nor does it recommend specific investments, including stocks, securities or cryptocurrencies.<\/em><\/p>\n\n\n\n

If you leave a job or retire, you\u2019re often encouraged to roll over your 401(k)<\/a> or other workplace retirement account into an individual retirement account. That might not be the right move.<\/p>\n\n\n\n

Workplace plans have rules that can protect you from subpar investments and advisors who put their own interests ahead of yours. IRA investments can be more expensive, which can result in less money to spend in retirement<\/a>. Workplace plans also may offer easier access to your money.<\/p>\n\n\n\n

IRAs typically offer many more investment options, a fact heavily emphasized by the financial services companies that want your money. Rollovers are big business \u2014 the Investment Company Institute, a trade group, reports that households transferred $463 billion from employer-sponsored plans to IRAs in 2017, the latest year for which statistics are available.<\/p>\n\n\n\n

But just having more investment choices isn\u2019t necessarily better.<\/p>\n\n\n\n

\u201cWith a 401(k), your options are typically going to be more limited, but your options are also going to be squarely within your best interest,\u201d says Dylan Bruce, financial services counsel for the Consumer Federation of America, a nonprofit consumer advocacy group.<\/p>\n\n\n\n

Why the fiduciary standard matters<\/strong><\/p>\n\n\n\n

You usually have choices about what to do with your retirement funds<\/a> when you leave a job, and an IRA rollover is only one way to preserve the money\u2019s tax-deferred status. Other ways include leaving the account where it is (your former employer must allow this if your balance is over $5,000) or rolling the money into a new employer\u2019s retirement plan, if that plan accepts such transfers.<\/p>\n\n\n\n

Most workplace retirement plans are covered under the Employee Retirement Income Security Act, which imposes a fiduciary duty on the people and companies overseeing the plans. Fiduciaries are required to operate solely in the interests of the participants and avoid conflicts of interest.<\/p>\n\n\n\n

In the past, advisors weren\u2019t held to the same standard when recommending IRA rollovers, although that\u2019s changing. The U.S. Department of Labor is extending fiduciary coverage to IRA rollovers, recognizing that financial services providers often have a strong economic incentive to recommend them even when they\u2019re not in an investor\u2019s best interest. Bruce calls that \u201ca very good development,\u201d but it won\u2019t happen overnight. Enforcement of the new rules will be rolled out in stages starting next year, Bruce says.<\/p>\n\n\n\n

Workplace plans may cost less, offer more<\/strong><\/p>\n\n\n\n

IRAs are sometimes touted as being cheaper than 401(k)s on average, but often that\u2019s not the case. Since 2000, the cost of equity funds inside 401(k)s has dropped substantially, according to the Investment Company Institute. The average expense ratio for stock mutual funds in the U.S. in 2020 was 1.16%, while 401(k) investors paid about one third that amount, or 0.39%, on average. Expense ratios are the annual fees charged for operating and administering the funds.<\/p>\n\n\n\n

Fees make a big difference in how much your nest egg can grow. Let\u2019s say you invest $20,000 in a fund with a 1.16% expense ratio that grows an average of 8% each year. After 40 years, you\u2019d have about $282,000. With a 0.39% fee, your balance would be nearly $376,000, or one-third more.<\/p>\n\n\n\n

Accessing your money can be harder with an IRA, as well. You can\u2019t borrow money from an IRA for longer than 60 days, or it\u2019s considered a taxable distribution. Any money you withdraw before age 59 1\/2 is typically penalized as well as taxed, although the penalty is waived for certain withdrawals, such as for higher education or a first-home purchase.<\/p>\n\n\n\n

With 401(k)s, by contrast, you can begin withdrawing money at age 55 without penalties if you no longer work for the company offering the plan. If you transfer an old 401(k) account to a new employer\u2019s plan, you typically can borrow up to half of your total vested balance or $50,000, whichever is less, and pay the money back over five years.<\/p>\n\n\n\n

Furthermore, your 401(k) is also generally protected from creditors. Protection for IRAs varies based on state law.<\/p>\n\n\n\n

When a rollover makes sense<\/strong><\/p>\n\n\n\n

Many people don\u2019t want to leave money behind at their previous employer, and a rollover is a much better option than cashing out. A rollover also could be prudent if you don\u2019t have access to a low-cost 401(k), you want to consolidate multiple retirement accounts, your investment options are too limited or the advisor recommending the rollover is a fiduciary (and willing to put that in writing).<\/p>\n\n\n\n

It\u2019s essential to investigate all your options, though, before deciding an IRA rollover is the right one. This is, after all, money you hope will sustain you for many years in retirement<\/a> so it\u2019s important to choose wisely.<\/p>\n\n\n\n

\u201cIt\u2019s probably going to be for most folks one of the most important financial decisions of their lives,\u201d Bruce says.<\/p>\n\n\n\n

This article was written by NerdWallet and was originally published by The Associated Press.<\/em><\/p>\n\n\n\n

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