Today I will answer a common question I get from a lot of people. Do you have a situation, you are working somewhere, you change jobs, either decided to go somewhere else, you were laid off or you were fired. Whatever the reason, if you've been there for awhile you most likely participated in the 401(k) plan. Now that you have left that job and you have started your new job, you have to make a very, very important decision on what to do with that 401(k). The common question I get is this: Jeff, I've got my 401(k). Does it make sense to roll over into an IRA. Depending on your situation, most likely I will say yes, but there are some instances where it could make sense to roll it into your existing 401(k), which I will address in another video. Today I want to make the case why you should at least consider rolling over the 401(k) into an IRA.
First and foremost, you want more investment choices. Most commonly what I see in most 401(k) plans you are going to have approximately 12-15 investment choices to choose from. I have seen some bigger plans that are going to have 40, 50 or maybe even 60 investment choices, but generally that is what I see. If you take that money and roll it over into an IRA, instead of just having those 12-15 investment choices, now your just opened up to the world of all the different investment options that you have. If you want to invest into individual stock, you can do so in the IRA. Most likely, you weren't allowed to do that in your 401(k). That also applies to other investments that you will be able to invest in too.
For me, first and foremost, that was the number one sole reason why you should at least consider rolling over your 401(k) into an IRA. There are some other reasons. Number two: What about the simplification of your life by the consolidation of paper and account statements. I can remember one particular case, where I had a client. We sat down and he had seven different 401(k) plans. Imagine getting seven different quarterly statements and trying to sort through it. Not only that, but also trying to keep track of the investment strategy of what is going on with those seven different 401(k) accounts. By rolling over to an IRA, and now you're being able to consolidate into this one account and if you change jobs several times, why not consider consolidating and simplifying your life. I'm all about less paperwork. Less paperwork equals more efficiency and easier to keep track of what is going on in your financial life.
Number 3: Another aspect you want to consider rolling over into an IRA, especially if you are approaching on your retirement is being able to control your retirement income. Typically, when you take a distribution from a 401(k) plan, they are going to withhold the standard 20% tax withholdings. Once you roll over to an IRA, you have some discretion, as far as how much taxes you want to be withheld from your distributions. When it comes to retirement planning and income planning, the less that you have to pay upfront to Uncle Sam, the better. Now, in the first year retirement, it is a little bit harder to determine what the exact tax may be, but typically after I have been working with a client for a year or so, we can kind of gauge how much taxes we need to withhold from our distributions to make sure that we have taken enough out for the end of the year.
Another consideration regarding distributions from IRAs and why you should roll over from your 401(k) is if you are approaching 70-1/2. Once you hit age 70-1/2, you have to start what's called required minimum distributions. Within the IRA, now you have discretion, as far as what investments you want to liquidate or remove from the IRA. Maybe there is something that is not performing as far and you would like to take that or liquidate it out of the IRA. With the 401(k) and those limited investment choices, you are not going to have as much say on what gets liquidated.