401k plans Vs IRA plans

Deciding weather or not to roll over your 401k to an IRA can be a difficult decision. After all for many people this is the largest check they will ever get from their employer and they want to make sure they get it right. However there are many advantages that an IRA offers you that your 401k doesn’t. Let’s examine the 5 reasons you might want to move your 401k to an IRA as soon as possible.

Are you familiar with the Stretch IRA? We don’t have the room to explain it in this article but it is one of the greatest gifts the IRS has ever given those of us who have IRA plans. It basically allows you to leave your IRA to your children or grandchildren and allow them to continue the tax deferral of your IRA over their lifetime. (certain restrictions apply) What does this have to do with your 401k? Many 401k plans do not allow for this option and will force your beneficiaries to cash out your plan much sooner than they would like if they are trying to postpone taxes. Won’t they have to pay tax eventually anyway? Sure but with the Stretch they can delay the tax so long that the compound tax-deferred interest will be so great that the IRS will never catch up. Leaving your money in your 401k may very well prevent you from using this wonderful tax planning tool. If this was the only consideration most people would do the rollover based on this alone but there are many other things to consider.

Another reason rolling the 401k over to an IRA makes since has a lot to do with the first reason. One reason the Stretch does not work well in a 401k is that your plan usually requires that you name a spouse as a beneficiary. Most of the time you and your spouse have about the same life expectancy and so this does not help you defer taxes much longer but it also presents another problem. The other problem is that when doing proper Estate Planning it is often a smart move to name children directly on certain assets to take full advantage of the Estate Planning rules. Doing so will often double how much money a couple can leave to their heirs without having their assets subjected to the dreaded estate taxes. Funds tied up in a company 401k plan do not allow you to name children or grandchildren without a signed waiver from your spouse. This can cause many problems as we get older as having someone sign a consent can become more difficult due to diminished capacity or other concerns. Even if you think this does not apply to you there are still many more reasons to consider rolling over your 401k to an IRA.

Having choices as to where to invest your money is particularly important in these economicly volatile times. When you leave your money in a 401k you can only invest in the options that they give you but if you roll your money over to an IRA the entire investment universe is yours. You can fund an IRA with any mutual fund, or bank CD, or insurance company annuity, or almost whatever you choose. You can even fund an IRA with real estate or gold coins if you want to. But if you leave it in your 401k you can only invest where they let you invest. I don’t know about you but I don’t like people telling me what I can and can’t do with my money. And your company may have great fund choices today but management may decide to go in a different direction tomorrow. I know of one of my clients whose boss changed 401k administrators 3 times during her employment. Each time she was given a new set of mutual funds to choose from. What if you don’t like the choices? What if management does a lousy job of picking your options? You’re stuck.

Here is another control issue for you. With an IRA you have no withdrawal restrictions. You are in complete control and you don’t have to ask permission to get at your own money. However in a 401k plan they may not let you have your money early even it is for something as serious as a personal hardship and you are not yet 59 1/2. And even if they do allow you access getting your hands on that money may take some time. Now if you need cash right away this could put added pressure on you that you just don’t need.

Last but not least IRA’s generally come with more help. Think about it, when you ask for advice on your 401k who do you have to call? Isn’t it usually your human resources department? Are you used to these folks going the extra mile to give you great advice and careful attention? Or do you sometimes gat a less than enthusiastic clerck that really has no interest in your financial success? When you roll over your 401k to an IRA depending where you place it you can often gain access to an advisor who works for you, not your company, and they will often help you customize not only your IRA but your entire retirement plan.

If keeping more control over how you invest or when you can access your money is important to you than you will probably want to roll your 401k over to an IRA as soon as you are eligible to do so. Also if you think you may want to do some tax planning to help you stretch out your tax burden over multiple generations and allow your money to grow to it’s maximum potential and avoid estate tax if applicable than you may also want to roll over your 401k to an IRA as soon as you get the chance.