IRA Rollover versus 401(k)

Money BrainIf you have ever left a 401(k) at a previous job, you are probably wondering what you should do with your money. If you have over a certain amount, many 401(k)s will allow you to leave the money there or you could roll the money over to an IRA. Below is a list of seven questions you should ask yourself to determine where your money should be.

1. Do you want to be the financial advisor on your account?
Do you feel comfortable answering these questions: Am I saving enough? Am I taking the appropriate amount of risk for my age and time horizon? Which investments should I hold? How do I make my money last for all of my retirement? If you already know the answers to those questions and are competent at deciding the asset allocation of your 401(k), then your current 401(k) may be sufficient. If you don’t know the answers to those questions, then you may want to roll out your 401(k) into an IRA at Smedley Financial where we can help answer these important questions.

2. How much do I value regular feedback and personalized advice?
Most 401(k) plans are limited in the advice they can render because of fiduciary liability. If you have ever asked a 401(k) advisor where you should invest your money, you may have received a response like: “Where you feel comfortable.” 401(k)s also can’t handle non-retirement investments, real estate, or life insurance. In addition, 401(k) advisors are typically servicing too many participants to provide personalized advice. Seek out a private wealth manager, like those here at SFS, that can advise you on your whole financial situation and align your investments with your goals and values.

3. Is the investment choice important?
Many 401(k)s offer a limited number of investment choices, typically 10 to 20. They may be lacking the ability to diversify into many other investment options that could boost return or diversify risk. IRAs tend to offer a much broader choice of investment selections. For example, our brokerage account has access to over 3,000 different investments. Review the investment options available and determine if they allow for appropriate diversification and if they have had good investment performance in relation to their benchmarks.

4. Do I understand how to compare fees and expenses?
Thanks to recent laws, 401(k)s are now required to disclose their annual fees, which makes this comparison easier. Compare the fees for the 401(k) and the IRA by looking at the total fee and what services are provided for that fee.

5. Am I between ages 55 and 59½?
For employees that separate service between the ages of 55 and 59½, some 401(k)s allow penalty-free withdrawals. IRAs on the other hand only allow penalty-free withdrawals after the age of 59½. Determine when you may need your 401(k)/IRA money and whether you have other sources that can bridge the gap between retirement at an earlier age and age 59½.

6. Am I concerned about creditor protection?
Both 401(k)s and IRAs generally offer substantial credit protection. 401(k)s are typically excluded entirely from bankruptcy proceedings while IRAs are typically excluded up to a maximum of $1 million. Check with your state to verify any state specific rules.

7. Do I own employer stock in my 401(k) plan?
Before cashing out your company stock in your 401(k), consult with a tax advisor to determine if a tax strategy called Net Unrealized Appreciation could benefit you. Depending on your individual circumstance, the company stock may be taxed at a lower rate. Once company stock is transferred to an IRA, it is treated like the rest of the IRA money and is taxed as ordinary income when it is withdrawn.

Before making these or any important financial decisions, talk to the Wealth Management Consultants at Smedley Financial so they can help you reach your goals.

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