Reasons to NOT
Roll your 401k into an IRA
A new service for 401ks now allows more flexibility for advice inside plans.
Concerns that some securities brokers and insurance company representatives were encouraging investors to roll their 401(k) plans into high-cost or inappropriate investments that generated big commissions was one reason the U.S. Department of Labor proposed new requirements for financial professionals who advise investors with retirement accounts. We thought it would be a good exercise to explore options and reasons why investors would want to keep their 401ks as well as reasons for rolling funds into IRAs.
Reasons to stay in your 401k
- 401ks allow penalty free withdrawals at 55 while you have to wait until 59 1/2 in IRAs
- Loans are sometimes available in 401ks while you are still working
- Stable value funds are more available in the 401k
- IRAs may offer less protection from creditors and lawsuits
- Keeping funds in your 401k may allow you to more easily convert funds to Roth IRAs tax free
- If your advisor is not a fiduciary (either a Certifies Financial Planner or a Registered Investment Advisor), the broker only has to adhere to a “suitability” standard of adestate vice
Reasons to Roll funds into your IRA from your 401k
- Not all 401ks allow for flexible withdrawals and the IRS requires 20% withholding on all withdrawals
- Roth 401ks require mandatory withdrawals white Roth IRAs do not (until you pass away)
- Not all companies allow you to keep the 401k after you leave
- More estate planning flexibility via beneficiary options, etc…
- You can convert funds to Roth IRAs more easily
- Greater investment selection
- Potentially lower fees
- You can consolidate funds into one IRA account
- Even if you don’t consolidate the IRAs you do not have to take an RMD from each individual account, unlike 401ks
- Ability to work more effectively with a financial advisor (although some Registered Investment Advisor firms, like ours, can also provide almost all these services within the 401k
What is Now Available through Easy-K
If you choose to keep your funds inside your 401k (which may be better especially for individuals under 59 ½) we can still advise on these assets. We can study and trade into new fund options as they come available and make rebalancing adjustments at least semi-annually. We keep you abreast of these changes, trades and rebalances as they happen as can be seen below. This recent adjustment was made within the last month.
CURRENT HOLDINGS NEW ALLOCATION
In years gone by clients would have to print out new fund availability, bring it to us, and let us study the options. After we were able to advise on a new recommended allocation, they would have to make the adjustments themselves. Over time we noticed that some clients made adjustments quickly while others may have had more issues navigating the site and making the changes. Today we can do this all for them through this new technology.
Of course, as in all things, you get what you pay for, and we cannot do this all for free. Our fees are typically lower for those who want us to utilize this service because as the assets we manage increases, the average fee decreases. Approximately 25% of our management fee pays to the 401k service, but the cost to the client is the same within the 401k as it would be if they were to roll the funds into an IRA. In many cases, the client may be better served to keep the funds in the 401k until they are over 59 ½ and are no longer working for their current employer.
Joe Franklin, CFP®President, Wealth Advisor Franklin Wealth Management, LLC
Franklin Wealth Management, 4700 Hixson Pike, Chattanooga, Tennessee 37343, United States