Why Rolling Over Your 401(K) After Leaving The Job Is A Good Move
Have you left a company that offered 401(k) benefits? I recommend rolling over your 401(k) into an IRA under your name as soon as you can. There are several reasons doing this will benefit you.
Greater Investment Selection
Companies that offer 401(k) benefits typically have an average of no more than 21 investment choices for you to invest in. Plenty of company 401(k) plans offer funds with front end, or back end sales loads and 12b-1 fees. These up front, and back end costs eat into your return. And with only an average of 12 funds to choose from, this offers limited diversification, not to mention the investment choices may not be most appropriate for you. 401(k) options offer a run-of-the-mill, one-size-fits-all approach, where as opening an IRA allows you to truly customize your investment portfolio. With over 9,000 mutual funds available within the mutual fund universe, IRAs offer significantly more choices compared to a typical company 401(k).
The following investment options are allowed under an IRA but rarely allowed in a 401(k) plan:
- Individual stocks such as AT&T or Merck
- Exchange Traded Funds (ETFs)
- Sector funds such as International Mutual Funds, Mineral-Based Funds, Energy Funds, Health Sector Funds, and thousands more.
Enhanced Investment Control
Enhanced control over your investment portfolio is possible when you rollover your 401(k) into an IRA — with a 401(k), the only thing you can really control is how much money you put into the account on a paycheck-to-paycheck basis. Let’s say you want to put your money in higher-risk, higher-gain investments. You can do that with an IRA, depending on your risk tolerance and your long-term savings plan, but not with a 401(k). There’s also many more low-fee investment options to take advantage of with an IRA. With a 401(k), often the only low-cost investment option you have is a simple S&P 500 index fund, and even that index fund may have higher fees and expenses than other typical index funds.
Managing Your Portfolio In Once Place
Instead of having multiple different retirement accounts, you are able to manage one account, with all of the money under your name. This not only makes it easier for you, but also allows the effect of compounding interest to seriously add up. Think about it, 3% dividends on more capital equates to more return on equity. And after several years, the interest begins to earn interest at a high enough rate that your portfolio begins to grow at a higher rate.
It’s Your Money, Not Your Employers
When you leave the company managing your retirement savings, it doesn’t leave with you. After you’ve left your company, it becomes difficult to change the allocation of your investments within your account, because you may not have access to the forms and websites to change your investments. The absolute worst-case scenario would be the plan administrator changes or the company goes belly-up. We witnessed an individual lose over $800,000 in a company 401(k) upon the corporation filing bankruptcy. It was devastating to hear about this and the impact it had on the family.
Withdrawals Become Simpler
Emergency withdrawals are typically much easier in an IRA than a 401(k). Make no mistake, any withdrawal before you reach age 59 ½ will include an additional tax also called an early withdrawal penalty. However, if a life event occurs where it makes sense to pay such a penalty, doing so is typically much easier from an IRA than a 401(k).
Roll your money over into an IRA either upon leaving the company or shortly thereafter. Your IRA then becomes attached to you and you alone, not to your company or another entity that you might not know how to contact. This way, you always know where your money is and who to contact in regards to your investment mix.