I sometimes get the idea lawmakers think the average American worker is plain stupid. I recently read an article in USA Today about congressional auditors that said workers are getting false or misleading information about their retirement money. I was interested in the topic because I recently rolled over money from my 401(k) to a Rollover IRA after the company I work for was sold.
Evidently the Government Accountability Office discovered financial firms encourage workers to roll over their 401(k) into an IRA. They suggested the firms may be guiding people toward IRAs with higher fees. I find that notion to be completely ridiculous since the same people complain there are too many hidden fees associated with 401(k) plans.
Having more freedom
I was thrilled to have the opportunity to roll my 401(k) plan over to an IRA that I could control. I opened an account with a discount brokerage firm that allows me to buy and sell individual stocks and other ETF or exchange traded funds. My 401(k) plan offered me very few options. I did have to pay higher fees with my 401(k). With my IRA, I only pay a small commission when I buy or sell.
Being temped to cash out
Some of my colleagues decided to cash out of their 401(k) plan after the company changed hands. For the employees who were less than 55 years old, the financial move was idiotic. Now they will have to pay a 10 percent penalty to the IRS as well as ordinary income taxes. I will say that our new company educated people about the penalty for cashing out the retirement account early. They reiterated the point on several occasions.
Doing away with penalties
If the government really wanted to assist the average worker today, they should do away with penalties for early withdrawal. People should be able to use their retirement money to buy real estate if they want to. While there are some self-directed IRA plans, the government still puts ridiculous constraints on those plans. For example, a person can't invest in a property that is for an immediate family member. Although I understand why money taken out of a 401(k) or IRA is taxed as ordinary income, I can't understand the IRS 10 percent penalties.
Perhaps it doesn't hurt to provide consumers with clear information about their options. But in my experience, it's always better to have money in a Roth IRA or regular IRA as opposed to a company-sponsored retirement plan. When my company changed hands, I could have rolled the money over into the new company's 401(k) plan. To me, that was akin to going from one controlling boyfriend to another. Why would I want to limit my choices if I didn't have to? With my Rollover IRA, I have total control and freedom. And contrary to what the Government Accountability Office reports, I am not paying hefty fees for that freedom.
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