Aaron Cirksena is the founder and CEO of MDRN Capital.
Reaching age 59-and-a-half unlocks a number of new possibilities for those who have been building value in a 401(k). Before that age, removing money typically involves a 10% early withdrawal penalty, on top of being subject to income taxes. After 59-and-a-half, however, 401(k) holders have the freedom to optimize those funds in a number of ways.
For those still working at that age, finding the best option for their 401(k) can be a little tricky. One of the key benefits of the 401(k) is the matching provided by the employer who sponsors it. Although that benefit is lost when a 401(k) is rolled over, there are a number of upsides to a rollover that may outweigh the loss of matching.
The following are factors investors who have reached 59-and-a-half should consider to determine the best course of action for their investments going forward.
Rollovers can empower greater flexibility.
Greater flexibility is a top feature investors will gain when they roll their 401(k) into a self-directed IRA. This can be especially valuable as you approach retirement age and seek to develop an optimal mix of investment assets that takes into consideration your unique needs as well as general economic factors.
Employer-sponsored 401(k) plans typically require participants to choose from a small number of options that focus on standard investment strategies. Providing too many options can make the choice overwhelming, which discourages participation. Employers also have certain legal responsibilities when it comes to the options they provide, which they seek to meet by offering a small number of well-established funds with a solid record of performance.
Choosing to roll over your 401(k) to an IRA opens up a world of investment options. At the very least, rolling over can allow you to fine-tune your risk mix to address your unique needs. If, like many U.S. investors nearing retirement age, you find yourself behind in your goals, moving your current funds into an IRA can allow access to a wide range of new strategies.
A rollover can also open the door to alternative investments rarely accessible via a 401(k). Real estate, for example, is an asset class accessible via an IRA that can serve the financial needs of retirees. IRAs can also open the door to investing in precious metals, which can provide a hedge against market volatility and inflation.
In some cases, you may have a “self-directed” option accessible via your company’s 401(k), which is more common with solo 401(k)s utilized by a self-employed individual but can be found in some companies’ benefits. If it is an option, make sure to determine if it involves additional fees not associated with standard plan offerings.
Rollovers can reduce tax exposure.
The enhanced flexibility a self-directed IRA offers can also help investors respond to the ever-changing tax landscape. Even if tax law remains the same, the shift in income level that retirees may experience can shift them to a different tax bracket. Having funds in an IRA offers more options for tax avoidance.
For example, an IRA provides more flexibility for tax conversion strategies, in which the overall tax burden is lowered by strategically moving funds between accounts. Funds can be moved from a traditional IRA, where funds are taxed upon withdrawal, to a Roth IRA, where retirement withdrawals are tax-free. That type of strategy can help stretch retirement savings as investors move from the accumulation phase to the disbursement phase.
Rollovers can involve higher fees.
Low fees are one of the top benefits of company-sponsored 401(k) plans. The large pool of investors that companies typically bring to the plans allows them to access lower-cost “institutional shares” of mutual funds rather than the more expensive “retail shares” available to single investors. Administrative fees associated with a 401(k) plan are also sometimes paid by the employer.
Those choosing to roll over should carefully investigate the new fees they may be picking up as they switch to a new plan. In some cases, such as moving to a variable annuity, the fees can be considerable. In any case, additional fees will cut into your investment growth and impact the funds available to support your retirement.
Statistics show that working past the age of 59-and-a-half is becoming much more common in today’s economy. Consequently, many workers are left with the task of determining the best course for their retirement savings. For those who want to gain greater flexibility, even though it may come with additional costs, rolling over a 401(k) plan will most likely be the right choice.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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