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taxes on any amount withdrawn if it's a pre-tax 401(k).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
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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