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When many of us retire or simply change careers we may find ourselves with a 401K retirment plan which has been set in motion by our employer, up to this point we may know very little about retirment plans, yet you have one, and if you have had it for a long time you potentially have thousands of dollars. Sounds great up to this point, but what if iut could be better? what if there was a way to get even more money for your retirement , well there usually can be. Rollovers are becoming very popular as people begin to educate themselves on 401K’s vs IRA’s.

Is A Rollover from 401K to IRA Better For eveyone?

Absolutely not, the financial world is so complex with so many rules applying to so many different circumstances that there are countless ways to manage your retirement and all other finances. Nothing is a one size fit all and never will be. If you know your 401K has been outperforming the average IRA then why would you want to move? Usually large fortune 500 companies have these kind of 401K’s simply because the assets are managed by the company and these large companies have the resources to manage them well.

What is my 401 (k)?

there is no shame in having a 401k and not even knowing what it is. In 1978 US congress decided to help its citizens save and plan for their retirement. During the Tax Reform Act a tax deferred  saving s plan was authorised in section 401 paragraph K of the Internal Revenue Code. the 401 K came into action in 1982 and to this day is the most widely used retirement plan, simply due to the fact it is so easily set-up through your employer. Any solid company within the US will have a 401K offerin g financial contributions, immediate tax relief, compound savings and earnings growth within your personal tax shelter.

A 401K comes under the category of “defined contribution” as the amount contributed is defined by you the employee or the employer which is the same as an IRA, a company profit share and a money purchase plan.

 401 (k) Characteristics 

The main points to know about your 401 k are as follows

  1. You and your employer must agree on the amount you will contribute. The limit set in 2014 is $17,500 for employees or 15% of total salary.
  2. Your contribution is deducted before taxes which makes it fairly efficient.
  3. Most companies will have incentives for you to contribute to your plan, the better the incentives tends to show how much your company cares about its employee
  4. A third party will make the actual investment decision based loosely on your given asset mix and risk level, all whilst ensuring the investments are allowed under IRS rules.

So Why Move From 401K To IRA

Lower Fees

Most of the time as rule of thumb fees are lower for an IRA, this immediately scores a point for IRA, if an IRA and 401K performed exactly the same then the IRA would win on this basis alone, a simple but fair point won. An IRA is normally managed via a large bank or financial advisers, they get paid through commissions and not directly through your pocket where as your companies 401K is likely charging you a fee. But before you make a decision you need to find out what kind of fees your actually paying, so ask your 401k management.

Full Control

Assuming you have a self-directed IRA you will have complete control of what you invest in (so now you can invest in gold), now if you do not know your markets that well then maybe you see this as a disadvantage, which is fair enough, you can however have your custodian advise you, however they would usually charge an advisory fee, perhaps around 1% of your investment. Now this is where it is up to you to calculate how much that percentage is compared to the fee charged on your 401K.

Investment Options

401K’s will often follow a set amount of investment options, which is usually an incredibly low number of 28, yes by this we mean 28 different stocks/bonds/commodities or currencies, when in actual fact there are 1000’s of different things to trade in like precious metals (clearly our favourite). With an IRA you can invest in anything recognised by the IRA. If you were to think about this logically the chances of the best investment is unlikely to be in just those 28 options, in fact those 28 are more likely to be the most stable assets, which again is not a bad thing, but your money will not get the best yields or capital gain this way.

401k to Roth or Traditional IRA

There are a number of scenarios that you could be faced with, however they are simple to explain if you follow the basic rules for Roth and Traditional IRA’s.

401k to Roth IRA will simply mean that you will be liable to paying tax on retirement funds before you rollover, now if you are unaware how a Roth works this may sound bad but if you have read all our Roth IRA guides then you will understand why this is not so bad, so please read through.

A 401K to Traditional IRA will mean that no tax is paid initially, however with accordance to the traditional IRA system you will be paid tax in your retirement when you withdraw the funds, again you must fully understand what a Traditional IRA is before making a decision. I suggest you get an understanding of ROTH IRA vs TRADITIONAL IRA

Rollover 401K to IRA Q&A

Will a 401k rollover mean I can include alternative investments?

Only If you opt for a self directed IRA. There is actually very little reason for you to rollover from a 401k to a non directed IRA simply becasue there will be less difference in the way your money is invested, unless you have a good IRA deal. They would both stay away from assets such as Gold or Bitcoin and invest in stocks and bonds meaning a switch may have been a pointless move. However if you are keen in investing in anything precious metal or digital currency then a self-directed IRA may be your only option moving forward.

What tax can I expect after my 401k rollover?

This will depend if you go for a Traditional or ROTH IRA, they both offer different taxing options and then also you pay bracket. What you will need to do is work out your pay bracket, know how much you have to rollover and then work out which will be more beneficial for your own tax purposes. It can become a little confusing so we would recommend reading our explanation of the different choices available to you here if you then need to know more then contact us via any form on this site.

Shoul I rollover my 401k after retirement?

Short answer is yes, firstly it is just not good practice to keep your retirement connected to your former employer. One major driving factor behind why you should rollover is many companies use their employees retirement funds to invest straight back into the company, If the company were to go under then so may your retirement plan’ regardless of how well it is performing. This on top of all other benefits such as more control, lower fees and better cashing out options makes this question a no brainer for many of us.

Can I rollover to Roth IRA even if my 401k is over $5500?

Yes you can, the $5500 is the limit you can contribute per year. The basic rules of a ROTH are still largely based on Traditional IRA which are far more limitless and for people with more funds. ROTH IRA was designed fort those within a lower salary bracket however even the wealthy can open a back door ROTH and transfer large amounts into a ROTH, usually from a Traditional IRA which has already been heavily funded, we may even be talking about millions not just thousands of dollars.