We work with a lot of high earners who have several old 401k or other retirement accounts lying around. They want to know what they can do with the money. Can they withdraw it? Should they roll it over to a plan with their new employer? Or something else?
“Assuming you can dig up all your old passwords, it’s almost always better to consolidate any old 401(k)s into a traditional IRA.”
AVOID TAXES AND PENALTIES
Contributions to a 401(k) are tax-deductible, so you’ll want to roll the money over to an account that has the same tax treatment. Simply withdrawing the money or rolling it into an account with a different tax treatment will trigger regular income taxes and a 10% penalty.
IRAs ARE USUALLY CHEAPER
Just because you can’t always see the fees involved with a 401(k) doesn’t mean they’re not there. They exist, all right, and they can be pretty high.* Long term, these fees can make a serious dent in your return.
Meanwhile, setting up an IRA is free. The investments within the IRA, like an ETF or mutual fund, may charge small fees, but they probably won’t be anywhere near as high as those involved in a 401(k).
IRAs HAVE MORE INVESTMENT OPTIONS THAN 401(k)
A 401(k) has a pre-selected group of funds from which you can choose. IRAs, on the other hand, allow you to explore a wide variety of investment options like stocks, mutual funds, bonds, and ETFs. This feature gives you more flexibility in implementing investment strategies that fit your own unique financial goals and timeline.
K, I’M CONVINCED. HOW DO I ROLL A 401(k) TO A TRADITIONAL IRA?
- Set up a traditional IRA, either online or with a financial advisor
- Call your old benefits department or plan administrator and tell them you’re rolling your 401(k)
- They’ll cut you a check
- Deposit the check within 60 days of withdrawal to avoid a 10% penalty. Your administrator can even send the check directly to the firm where you opened your new IRA.
One Last Thing:
We get a lot of q’s about back-door Roth contributions, a strategy some high-income earners employ to get around the income limits set on Roth IRAs. Stay tuned, because we’re going to devote a whole blog post to back-door Roth contributions soon. Suffice it to say for now that this method often isn’t as effective as it might seem.
*All 401(k) Plans are administered differently, so you should always double-check how your old plan stacks up so you can make an informed decision about whether rolling the assets over to an IRA would be beneficial.
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