Is your retirement account looking a little paltry? You are not the only one—but it is a serious issue. The Financial Times reports that around 45% of working-age households have literally zero retirement savings, in part because of the growing pension crisis. Pensions are no longer the norm, but many workers have no retirement accounts at all, whether we are talking about a 401(k) or IRA.
If you do have a 401(k) which is doing well, count yourself lucky. How much should you have in your 401(k)? The answer is quite simple (though perhaps not very satisfying), and that is, “as much as possible.” Of course, that is not easy to do if you are juggling a mortgage and other household expenses.
But what happens if you change employers? These days that is increasingly common, which is one of the reasons that many employees no longer have retirement accounts at all. It is complicated setting up a 401(k), and there are so many pitfalls and fees that many people simply shy away from them altogether. If you do open 401(k) plans at each of your employers, you can end up with a lot of legacy 401(k) plans as you jump from job to job. Keeping track of these can be quite difficult.
This is one of the reasons you might want to consider rolling over your 401(k) into an IRA. But should you roll over 401(k) to IRA? That really depends on your situation. Let’s take a quick look at the pros and cons so you can understand the benefits and drawbacks to doing so.
Advantages of Rolling Over a 401(k)
- Your accounts will be consolidated. This can be extremely helpful if you now have a number of legacy 401(k) accounts. If you lose track of them or forget about them, you will have no idea what is going on with your finances, and you will find them hard to manage. If you roll them all over into an IRA, you will have everything in one place.
- You will have more versatile investment options. Companies limit the investment options in their 401(k) plans to keep costs down. With an IRA, you have more diverse investment choices.
- Because IRA plans are more efficient, they also tend to be more cost effective. 401(k) plans often have high fees, and there is nothing you can do about that since you only have a finite number of plans to choose from. But with an IRA, you can pick a plan which you can afford.
- Distribution options for IRAs are more flexible than they are for 401(k) plans. This can be a benefit if you die before you can tap into your 401(k) accounts. The person inheriting your IRA accounts will find it easier to withdraw the money. These additional withdrawal options can benefit you directly as well.
- You have full control over your IRA—unlike your 401(k) plan. What if the company tanks? What will happen to your retirement savings? With a 401(k) plan, you cannot be certain. But if you have an IRA, your money is safe since you are in charge of it.
Disadvantages of Rolling Over a 401(k)
- The typical 401(k) plan has a lower minimum balance requirement than the average IRA. This means that it is easier to get started with a 401(k) than an IRA. You may have a hard time setting up an IRA at the start of your career.
- If you need to borrow from your employer’s retirement fund, you will only be able to do that with a 401(k).
- Despite the fact that an IRA will give you more investment options than a 401(k), you may still not find the investments that you want.
- If your finances should take a nosedive and you end up in dire straits, you will have a hard time protecting an IRA from creditors looking to seize your money. Declaring bankruptcy is the only real way around this. But if you have a 401(k), you have a lot more legal protection.
Regardless of what you decide to do, the key to saving for retirement is to make sure that the decision you make is right for you. So do more research and carefully weigh the advantages and disadvantages of rolling over your 401(k). If you make the right choice, it can help you to cut back on fees and make more through your investments. This will not only help you to save for retirement, but will also help you to enjoy a higher standard of living in the meantime.