Rolling 401(k)s Into IRAs - Can You Do It And Should You Do It?

It’s often posited as being the most financially beneficial strategy for the majority of higher-income earners, but is rolling your traditional 401(k) into an IRA right for you? Today, we take a quick look at the difference between the two types of pension, and explain why this is such a hot topic amongst those with an eye for financial success.

What Is A 401(K) Plan?

A 401(k) plan is an automatic pension where employees and employers match some or all of the contributions. No tax is payable until the pension pot starts being used, and taxation then depends upon the type of plan. In general, this tax-advantaged strategy is popular among those with mid-to-high income via formal employment. Typically, a 401(k) holder will be invested through a lifestyle strategy; this is where a set retirement year is chosen and everyone with that year of retirement has the exact same strategy. Higher risk in the early years, moving to low risk in the latter years. Whilst this is a fine default strategy, almost everyone will have a different retirement plan, needs, assets and circumstances, so it may not be most appropriate.

What Is An IRA?

Another form of tax-advantaged saving, individual retirement accounts (IRAs) are designed for people who want to take a more active and personalised approach to their pension.

An IRA typically offers much greater investment choice, allowing a pension to be tailored to an individual’s retirement plan, risk profile, family goals and currency needs. It is possible to hold GBP or EUR funds in an IRA, whereas a 401(k) has no personalisation and you must hold USD. This is a valuable benefit to non-US retirees, as it mitigates large fluctuations in their pension value which can be caused by not investing in their local currency.

Is It Possible To Get The Best Of Both?

As a general rule, yes, as long as your rollover is between two accounts that are taxed in similar ways. For this reason, 401(k) and IRA rollovers make sense in most scenarios. The other available options, such as either keeping, consolidating, or cashing out your 401(k), are less popular because they tend to limit investment opportunities. Cashing out is particularly challenging as to do so may incur significant taxes and sometimes penalties. Even though there is some initial cost involved, the rollover approach allows an individual to take control of their pension, reduce currency risk and increase investment potential.

How Do I Know Whether Transferring My 401(K) To An IRA Is Right For Me?

Rolling over from a 401(k) to a IRA is often a wise choice. Major firms sometimes win loyalty by offering a selection of 401(k) investment options, but in most cases they don’t have personal advisers to help you make the right choice or will only offer a limited range of investment opportunities, often their own funds.

Additionally, as the investment risk is absorbed by the organisation, an off-putting annual fee of around 1-3% is relatively normal. These limitations are part-and-parcel of the 401(k) experience, which is why so many people look for options elsewhere. When funds are transferred into an IRA, there is almost unlimited investment choice, usually with much lower costs. As such, most people will benefit from rolling over.

Personalised Pension Advice And Financial Management From Arlo Group

When looking to secure your long-term financial future, it is helpful to speak to a pensions expert. At Arlo Group, we offer in-depth, clear, personalised advice regarding the most financially beneficial retirement strategies for your circumstances and goals. We are experts in cross-border financial advice. To start exploring your possibilities, give us a call today.

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