Deciding what to do with previous retirement plans is one of the more common financial issues the average person has to deal with. Whether it's a 401(k), 403 (b), profit-sharing plan, cash-balance pension or deferred compensation, many people are unsure of what to do with these accounts once they've left a job.
For many, the solution to effectively manage these assets is to do nothing, but doing nothing may be the worst decision one can make. For most of our lives, we have worked to enjoy a lifestyle and to build savings and investments. When the time comes for us to retire, it is imperative that we have positioned our savings and investments to begin to work for us.
Let’s consider how best to deal with these funds for a successful retirement. In particular, what are the key differences between maintaining assets in a previous retirement plan and rolling them into a rollover IRA?
Benefits to Maintaining Funds in Retirement Plans
Two of the biggest reasons to maintain funds in a retirement plan are:
- The need to borrow against these funds. Loans are permitted against many retirement plan assets, most notably 401(k) plans.
- The need for ERISA protection against creditors, lawsuits, etc. ERISA shields retirement plans from creditors and lawsuits.
IRAs are generally protected against bankruptcy, but state laws vary with respect to other types of claims. In the case of Pennsylvania, state laws are considered to be extraordinarily strong, so there is still a high level of protection if funds are rolled over into to an IRA.
Rolling Funds Into an IRA
You should almost always participate in a current employer-sponsored retirement plan, which allows for payroll deduction and, in many cases, a matching contribution from the employer. But there are benefits to rolling previous plan funds over to an IRA.
The biggest reasons to roll funds from a previous retirement plan into a rollover IRA are costs and access. While many plans have access to an “institutional” class of mutual funds for lower expense ratios, the universe of choices still tends to only be mutual funds. There are also additional expenses related to administration, platform and advisory fees.
In addition to mutual funds in a rollover IRA, one may use individual stocks, exchange-traded funds (ETFs), individual bonds, CDs, and more exotic holdings such as real estate investments and options. The expense ratios for these investments may be 0 or negligible, and in the case of individual bonds or CDs, they may have predictable outcomes you can plan for, such as timing a maturity when you are required to take your first distribution.
A qualified advisor, preferably a fiduciary who is required to act in the best interests of clients, may add tremendous value through expertise, knowledge, analytic tools and access to products that offer a highly-customized plan for the benefit of the client. Effective estate planning by an advisor can save a tremendous amount of money in taxes, as well as shelter assets for your beneficiaries.
The Choice Is Clear
By comparing the merits of rolling funds over to an IRA versus a retirement plan you can see the first option offers:
- lower costs
- a broader level of diversification
- predictability of outcomes that one can’t replicate within a retirement plan
- customized investment strategies and personalized estate planning considerations
While many think this decision is a fairly even comparison, it is more like comparing apples to oranges. If you don’t have the same investment universe or level of control for defined outcomes, there is no comparison. It is simply a matter of being educated about the glaring differences and making an informed decision that best suits your needs and objectives.
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Our team at RZ Wealth is committed to helping clients prioritize and understand their needs to best guide them with insightful wealth management including financial, education, retirement and estate planning.