Why I Rolled Over My 401(k) to an IRA

US News

Last year, I left my corporate job and rolled my 401(k) over to an IRA. This was a great decision for me because the stock market did tremendously well over that period. When you retire, you need to figure out whether or not you should roll over your 401(k) to an IRA. There are pros and cons to both options, and every plan is different.

It can be beneficial to leave your money in your 401(k) plan. Here are some of the reasons you might want to keep your retirement savings in your former employer's plan:

Low-cost funds. If your previous employer has a good plan and you are happy with the investment choices, then it might be a good idea to leave your money where it is. Many 401(k) plans have access to ultra low cost institutional funds that may not be available to individual investors.

Lawsuit protection. Your 401(k) plan is protected from most lawsuits by federal law, but IRAs are protected by state laws. You need to check with your attorney regarding the kind of protection your state provides.

Access. If you need to access your funds before you are 59 1/2, then it's probably better to borrow it from your 401(k). Tapping your IRA could cause you to incur a 10 percent penalty, or you'll need to set up 72(t) distributions. Check with your 401(k) plan to see if you have the option to borrow from it. If you leave your job between ages 55 and 59 1/2 you can take penalty-free withdrawals from your 401(k), but not IRA.

In my case, I wasn't concerned about any of the above, so I rolled over my 401(k) to an IRA. Here are some compelling reasons why I did so:

Full control. The employer contribution portion of my prior 401(k) plan could only be invested in a private hedge fund. The hedge fund is pretty conservative, and I want to be more aggressive. The employee contributed portion could be invested in a few more funds, but the choices were still limited. After I rolled over to an IRA, I was able to invest in Vanguard funds and other stocks I prefer. As I mentioned above, the stock market did very well recently and my portfolio benefited from being invested more aggressively.

401(k) fees. Your 401(k) plan has expenses including administrative and record-keeping fees. In 2012, the average 401(k) expense was around 1 percent for large companies. I have to pay trading fees in my IRA account, but they are a lot lower than 1 percent.

Access. If you are older than 59 1/2, then it will be easier to withdraw money from an IRA. The withdrawal rules for each 401(k) plan vary widely, so you need to check with the plan. I'm not planning to withdraw any money until I'm in my 60's, so access isn't a big deal right now.

Estate-planning benefit. Your beneficiaries can take tax-deferred IRA distributions over their lifetimes and pay lower taxes. Most 401(k) plans will pay out in a lump sum, and your kids will pay a lot of tax the following April.

Consolidation. It's easier to manage all your investments from one account. These days, we change employers frequently and it could be difficult to keep track of all your 401(k) plans from previous employers.

The main reason why I rolled over my 401(k) to an IRA is because I wanted to have full control of my retirement portfolio. I like being a self-directed investor, and it's great to have more choices. I was able to buy low-fee index funds and reduce my $1,754.61 per year investment costs to less than $1,000. I also picked up a few individual stocks that I liked, and they did very well also.

If you decide to roll over your 401(k), be sure to follow the strict rollover rule. Ask your 401(k) plan administrator to transfer the money directly to your new IRA plan. If you get a check in your name, income tax will be withheld and it will complicate the transfer. As always, you should consult a professional if you have questions or need assistance.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing, and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.



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