Rolling over your 401(k) can be one of the most beneficial things you can do to ensure you have a comfortable retirement. But it also might not be necessary or even advantageous. Depending on your circumstances, there are times when rolling over your 401(k) to an IRA could even be against your best interests. Here, we’ll look at five of the biggest reasons you should not roll over your 401(k).
1. You plan to retire early
The Rule of 55 is one of the lesser-known secrets in financial planning, and it makes your 401(k) plan all the more valuable should you choose to retire early. If you retire the day you turn 55, you’ll have access to your 401(k) money penalty-free — though you’ll still have to pay taxes on any amount withdrawn if it’s a pre-tax 401(k).
Note that this rule doesn’t apply to IRAs, and you do need to be formally retired to access the money penalty-free; you can’t utilize the Rule of 55 if you quit your job only to take another one three months later. The Rule of 55 also acts as an incentive to roll IRAs into your 401(k) so you can have access to as much penalty-free money as possible.
2. You value increased creditor protection
Generally speaking, 401(k) plans enjoy special protection under the Employee Retirement Income Security Act (ERISA). Money in a 401(k) plan is sheltered in the event of a bankruptcy, and won’t be seen as available to satisfy your unpaid debts. Such plans also offer increased protection against general creditors and in civil lawsuits.
An IRA will be exempt (up to a certain amount) from bankruptcy proceedings, but not in other circumstances. Because the road ahead is uncertain for all of us, the increased protection offered by ERISA plans can be an incentive to ensure you maintain one.
3. Your current plan is sufficient
One of the main criticisms of 401(k) plans is that many of them come with unnecessarily high fees and hidden costs. Now more than ever before, this is less likely to be the case, but still does hold true in some situations.
An exceedingly simple 401(k) plan with minimal costs and a broad-enough investment menu is really all you need. So as long as your plan meets that criteria, there’s really no urgency to move it.
A balanced strategy you might consider is to have a 401(k) plan, contribute at least up to the employer match if there is one, and max out your Roth IRA every year. This way, you’ll take advantage of the benefits that your 401(k) plan offers while still maintaining an independent, tax-free IRA on your own terms.
4. You have the freedom to invest in what you want
Another main criticism of 401(k)s is the limited investment choices available within most plans. There are people who wish to invest in single stocks, crypto, alternatives, and a variety of other securities that most 401(k) plans won’t offer.
While some would say that this takes away from the quality of such plans, as long as the investment offerings include low-cost index funds, there really isn’t a huge problem for most investors. The strategy of buying the entire market at the lowest cost and simply allowing it to rise over time is a sound one.
5. You have a strong command of your finances
A final reason that you might roll over your 401(k) is that it tends to be easier to manage your finances when your accounts are consolidated. The fewer accounts you have, the easier they are to understand and ultimately control.
If you already have a complete recognition of all the accounts you have, and maintaining multiple accounts at multiple institutions doesn’t bother you, then perhaps you can leave your 401(k) as it is.
Less is more in many facets of personal finance, so you might feel less burdened with fewer accounts. But if you’re already comfortable with the way things are, there won’t be any real crisis if you do nothing.
A choice that deserves thought
The decision to roll over your 401(k) is, like most things, a personal one. Be sure to make the decision against the backdrop of your entire financial and tax picture, and don’t be afraid to enlist help in the form of a fee-only financial planner if things get complicated. Good financial planning takes time, effort, and consideration, so be patient with yourself and the results will follow.
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