Posted By: CFP&WM On: Dec 4th, 2009 In: Financial planning Investing Retirement planning

Should I Roll My 401K to an IRA?

Ok, you have gone ahead and retired. Now you are wondering, “What should I do with my 401K; leave it where it’s at or convert to an IRA?” Unfortunately, it’s not a simple question to answer. It depends upon the choice of investments as well as the ongoing costs of the 401(k) compared to that of an IRA. Other factors to consider are your age and whether you would need the funds before 59 1/2 as well as the amount involved.

Advantages of the keeping the 401(k) include:

  • You can borrow money from the 401(k) without penalty, as long as you pay it back.
  • If you’re less than 59 ½, you can withdraw money in your 401(k) under certain circumstances such as needing to pay medical bills. The qualifying expenses would have to be tax deductible and would exceed 7 ½% of your adjusted gross income.
  • If you become disabled before 59 ½, you can make early withdrawals from the 401(k).
  • Management fees of the funds within the 401(k) at very large companies are sometimes less than those of an IRA.
  • If the amount involved is small, you may get better diversification amongst different asset classes since the 401(k) often does not have a minimum account size.

Advantages of the IRA include:

  • Greater selection of investment options.
  • Management fees of the funds within the 401(k) at small to mid sized companies are often more than those of an IRA.
  • More freedom to switch investments with greater frequency.
  • The IRA may provide easier to deal with than dealing with a 401(k) and an existing IRA. There is less administration and record keeping with one account rather than two.

Once you have established that none of the advantages of the 401(k) would benefit you and that you understand the costs of the 401(k) compared to an IRA, converting to an IRA could allow for a better asset allocation than your 401(k).
Having the correct asset allocation of different investment types is perhaps more important then deciding to convert from the 401(k) to the IRA. The proper mix of asset classes can decrease your risk and increases your return. The allocation should be based upon your tolerance for risk, your capacity for risk and your goals including your timeframe.

Most people need some professional assistance to determine the proper allocation. Many financial publications recommend people use a “Fee-Only” advisor who does not sell products for objective advice that is free of conflict of interest (similar to a doctor or CPA).

If you convert to an IRA, considering using low-cost mutual funds and or exchange traded funds (ETF’s) to keep your investment costs low.

The time when it DOES NOT make sense to move your funds from a 401(k) to an IRA is when you are getting recommendations to buy a product that has commissions and high fees associated with the IRA. Unfortunately most financial advisors sell product and the commissions of 3 ½ – 7% can come right out of your account. Most retirees do not have the experience to fully understand the fees involved and the long-term impact on their nest egg.

If you are considering your options for converting a 401(k) to an IRA be sure to talk to a financial advisor who is not going to try to sell you the IRA.

Michael Chamberlain CFP®
CA Registered Investment Advisor

Send your questions to or call 800-347-1340

This article is for informational purposes and should not be taken as legal, tax or investment advice.

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