The decision to keep your 401k intact or do a 401k rollover to IRA is a critical one. Get this right, learn the 401k to IRA rollover rules, and it can add thousands of dollars to your retirement!

Do you have a 401k/403b with a former employer? Or perhaps with your current employer, but you’re considering leaving soon? John Frisch, President of Allied Wealth Advisors, joins the Wealth Summit to discuss whether you should keep your 401k where it is, do a 401k rollover to IRA, or cash out your 401k.

KEY POINTS
-the quality of your 401k investments plays a huge role in whether or not you should transfer it to an IRA
-find out if you should consolidate your various 401k accounts
-beware of hefty fees by active fund managers

IRAs and 401k/403bs each have their fair share of pros and cons, and each person should make the decision based on what’s best for their financial future.

This video doesn’t necessarily support one over the other, but rather John and Greg discuss the various options investors have when given different scenarios.

There are many factors to consider when making the decision of what to do with your employer-sponsored retirement accounts. 401k plans often have a higher level of investment quality because they have access to funds and managers that an individual wouldn’t be able to acquire with an IRA. Dimensional Fund Advisors is a favorite of both John and Greg; however, individual access outside of a large plan is nearly impossible to attain.

Many funds trace an index. If your plan is underperforming by 2% or more, switch to an IRA. However, if your 401k plan consistently matches the index (outperformance is unlikely), stick with it. Additionally, many employers are now providing professional investment management services, with relatively cheap fees compared to what an individual investor would be able to get from an advisor outside the plan.

Due to “economies of scale”, larger employers are able to charge smaller fees because the fees are spread out over an increased number of employees. However, many large plans are built upon layers and layers of fees, specifically those managed by insurance companies. Stay away from such funds.

It’s often difficult for a person who has multiple 401k and IRA accounts with several employers to keep track of where all their money is and what it’s doing. Consider consolidation of your employer-sponsored retirement accounts to improve both ease of access and organization.

Employees are eligible for 401k distributions at the age of 55 and IRA distributions at 59 1/2. If you transfer money from your 401k after the age of 55 into an IRA and then withdraw it prior to 59 1/2, you’ll have to pay a 10% penalty fee.

John strongly discourages ever withdrawing money prior to the eligible ages from either account due to the high and taxes. Remember, this money is for retirement—stay focused on the long-term vision and either leave it where it is or roll it over. Never cash out.

IRAs typically have less protection from creditors than a 401k plan. While you can protect up to a million dollars in an IRA from bankruptcy, if you’re sued the 401k offers far better protection. Creditor protection often depends on the state regarding IRAs, while the 401k is federal.

If you need distributions after you’ve rolled over to an IRA but before turning 59 1/2, the IRS Rule 72T allows you to receive equal distributions over the course of your life without receiving a 10% penalty. However, the formula and calculations they use are somewhat complicated, so John does not recommend taking this path on your own. Find an investment advisor or CPA to help if you’re seriously considering the IRS Rule 72T option.

Review all available options before leaving your employer in order to make the right decision regarding your employer-sponsored retirement accounts. Find out the option that best suits your financial situation—be that keeping it or rolling the 401k into an IRA. Never cash out and avoid high active management fees….(read more)

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