When I retired in 2012, I chose to convert my 401(k) into a rollover IRA since I could no longer contribute to my company’s 401(k) plan without earned income. This can also be a smart move if you’re switching jobs. Here’s why:
Pros of Converting Your 401(k) to a Rollover IRA:
1. More Investment Choices:
In my 401(k), I was limited to about 40 mutual funds, but with a rollover IRA, the universe of investments expands dramatically. You can invest in individual stocks, ETFs, and beyond, which gives you the freedom to tailor your investments more precisely.
2. Lower Costs:
Rollover IRAs often have lower fees compared to 401(k)s, especially if your 401(k) is filled with high-cost, actively managed funds. I discovered my 401(k) was costing me over $1,700 a year in fees, while my rollover IRA costs are significantly less.
3. Fewer Trading Restrictions:
My 401(k) limited how often I could rebalance my portfolio, but with an IRA, I can trade as often as needed without restrictions, as long as I maintain the necessary cash balance.
4. Simplified Tax Filing:
Trading within an IRA doesn’t require you to report every transaction to the IRS, unlike with taxable accounts. This means less paperwork and no surprise tax bills, like the one I got when the IRS thought I owed on $2 million in trades!
5. Penalty-Free Early Withdrawals:
Using Rule 72(t), you can take early withdrawals from an IRA without the 10% penalty, although these withdrawals are taxed as ordinary income. This can be particularly beneficial if you retire early and need to access your retirement funds before age 59.5.
Cons of a Rollover IRA:
1. Potential for High Risk:
The wider array of investment options can lead you to take on more risk than with a 401(k). While I pursue higher-growth stocks like Tesla and Amazon, the potential for large swings in value is greater, which isn’t suitable for everyone.
2. Can Be More Stressful:
Managing a broader portfolio can be more time-consuming and stressful. You might find yourself checking your investments daily, which can add to anxiety.
3. Retail Pricing and Fees:
Some mutual funds might offer lower institutional pricing through a 401(k) that isn’t available in an IRA, potentially leading to higher costs if you stick with the same funds.
4. Effort to Roll Over:
Moving your money from a 401(k) to an IRA takes effort and a bit of know-how. Many people delay this due to the perceived complexity or out of fear of making a mistake.
Conclusion:
Rolling over a 401(k) into an IRA is worth considering if you’re looking for more control over your investment choices and lower fees. Just ensure you understand your own risk tolerance and manage your investments wisely.
Besides, diversifying your portfolio to include private real estate can be another way to build wealth. Platforms like Fundrise offer a way to invest in real estate without buying physical properties, which complements traditional stock and bond investments well.
Lastly, tools like Empower’s Retirement Planning Calculator can help manage your investments more effectively by providing detailed analyses of potential future financial scenarios, helping you make more informed decisions about your retirement planning.
