Why You Shouldn’t Choose an IRRA
The only difference between an IRA and a (double “R”) IRRA is that the latter allows you to roll the balance back to a 401(k) in the future. But it’s ALMOST NEVER beneficial to roll your balance back to an employer plan. Don’t fall for the “flexibility” or “options” or “tax benefits” that make an IRRA seem like a great choice. Typically, employer plans like 401(k)s are more limited in investment choices and have higher fees than individual retirement accounts.
When leaving a job, you typically have three options on what to do with your 401(k):
Cash it out
We can’t dole out specific advice here because of compliance situations we could find ourselves in if we did, but it’s probably not a good idea for most people to cash out their 401(k) because you will most likely be hit with crazy high taxes and withdrawal penalties.
Leave it alone:
You aren’t eligible for any future matching and after a few jobs, you could end up with a ton of 401(k)s floating around, making them tough to keep up with.
Move it:
You can move (aka “roll” but we’re jargon-free around here) the balance to a personal retirement account, typically known as an IRA or IRRA.
IRRA is in the title of this article for a reason (besides SEO), so we’re focusing on this last option. We see a lot of HENRYs™ feeling super proud of their decision to choose an IRRA over an IRA. Hate to see it. Relax, we won’t just tell you choosing an IRRA over an IRA is a mistake - we’re going to explain WHY.
IRA vs IRRA
IRA
IRA stands for Individual Retirement Account. You can make cash contributions to this account. You can also consolidate your 401(k) balances from old employer plans into this account. Or you can do both.
IRRA
IRRA stands for Individual Retirement Rollover Account. You can do all the same things with this account that you can do with an IRA. That second “r” means you can do one extra thing that may sound like a benefit but is actually a useless perk.
The Pointless Point of an IRRA
The additional feature of an IRRA is that it allows you to roll the balance back to a 401(k) in the future. That’s one thing you can do with an IRRA that you can’t do with an IRA. (And there are caveats like being able to borrow against a 401(k) even though we don’t recommend doing that or that IRRAs are exempt from litigation but assuming you’re not being sued let’s leave those aside…)
Here’s the part they don’t explain very well: typically, employer plans like 401(k)s are more limited in investment choices and have higher fees than individual retirement accounts. That said, it’s ALMOST NEVER beneficial to roll your balance back to an employer plan. So, don’t fall for the “flexibility” or “options” or “tax benefits” that make an IRRA seem like a great choice – because they’re identical to a Traditional IRA. Literally. Hallie and Annie-level identical. And why you should almost never use one of the main features that makes an IRA and an IRRA different.
Wrap-Up
We’re not knocking the 401(k) while you’re working at a company. But once you leave, most of the benefits go away.
So the next time you leave a company and are deciding between an IRA and an IRRA, remember less is more and skip past the extra “r”.
Now you know better. As a disclaimer, we at Stash Wealth believe that technology should complement the advice given by a professional, not replace it. We’ve got options for HENRYs for those of you who want to understand the “why” behind the advice given.
Are you a HENRY? Take the HENRY Quiz.
Qualified as a HENRY? Work directly with your advisor in the Stash Plan.
Stash Wealth provides financial plans designed to assist high earning young professionals build and manage their wealth.
Stash Wealth offers a pragmatic approach to financial planning and wealth management. Whether saving up for Tahiti or a Tesla, we help you achieve your short-term and long-term goals.
Written by Priya Malani
Stash Wealth, Founder & CEO
Priya is a force in the personal finance space. As an industry disruptor, she specializes in bringing the unapproachable world of money to young professionals across the country.
