What to Do With Your 401(k) Money When You Retire
Advantages of leaving it where it is or rolling it into an IRA
Billions of dollars are at stake as boomers decide what to do with the $5.3 trillion they’ve invested in company-sponsored 401(k) plans when they retire. Leave the money where it is? Roll it over to an Individual Retirement Account (IRA) at a financial firm? For many, it’s a head-scratcher.
The topic is especially timely with the Wall Street Journal recently reporting that the U.S. Department of Labor is looking into whether Wells Fargo has been pushing retiring clients to move their 401(k) money into more expensive IRAs at the bank.
Financial advisers say there are pros and cons to leaving your 401(k) in place and to rolling it over into an IRA.
“It depends on the individual needs of the employee and the quality of the plan,” says Harris Nydick co-founder of CFS Investment Advisory Services in Totowa, N.J., and author of Common Financial Sense, Simple Strategies for Successful 401(k) and 403(b) Retirement Plan Investing.
“There is not a one-size-fits-all when it comes to making this decision,” says Dan Houston, chairman, president and CEO of Principal Financial Group in Des Moines,
5 Reasons to Leave your 401(k) With Your Company
Here are five reasons to consider leaving your 401(k) with your company — as 22 percent of 401(k) owners did when exiting, according to an Ameritrade survey — rather than moving it to a Rollover IRA when you retire:
1. You can pay lower fees Large companies with hundreds or thousands of employees use their sheer size to negotiate lower fees for their 401(k) plans. Employees then get to take advantage of fees that are lower than what they’d probably never get investing on their own in an IRA.
“One of the benefits of staying inside the 401(k) plan is they have a better fee structure, more competitive pricing and oversight,” says Houston. “You have an employer working with an adviser picking investment options and providing monitoring.”
2. You can avoid an early-withdrawal penalty “If you are 55 years or older, left your previous company after reaching age 55 and need to take a withdrawal from your 401(k), then it is best to keep the money in the 401(k),” says Zaneilia Harris, president of Harris & Harris Wealth Management Group in Upper Marlboro, Md. “You can take an early-access distribution without the 10 percent penalty that you would be subjected to if you roll the funds into an IRA.” That penalty ends at age 59½ for IRA.
3. You have access to loans and online help “It depends on the employer, but you may retain borrowing capability — up to $50,000 or 50 percent or your assets,” says Eric Bailey, founder of Bailey Wealth Advisors in Silver Spring, Md. “Also, you still have what I would call the electronic retirement planning software usually attached to employer plan which may assist on keeping your retirement on track.”
4. You can stay with the investments you know and prefer Your company 401(k) may have proprietary investments or mutual funds that you like, are familiar with and might not be available elsewhere.
5. You can get protection from creditors If you'd like to protect your retirement money from creditors and bankruptcy, a clause in the Employee Retirement Income Security Act of 1974 keeps your 401(k) money out of the hands of creditors.
5 Reasons to Roll Over Your 401(k) Into an IRA
And here are five reasons to roll over your 401(k) to an IRA, as 34 percent of 401(k) owners did when leaving their companies, Ameritrade said:
1. You will have more investment choices “The benefit of rolling a 401(k) into an IRA is you have a wide array of investment choices you can pick from,” says Nydick. “That can be good, and that can be bad. Hopefully, you are getting some good advice.”
2. You will have more withdrawal options. If you are retired and taking the money as income, a 401(k) can be inflexible, says Jeanne Thompson, head of thought leadership at Fidelity Investments. Depending on your company plan, a 401(k) might limit withdrawals to quarterly or annually. “If you want an income stream and they only allow for annual deductions, you will be in a difficult situation,” she says. “IRAs allow a lot more flexibility, allowing you to take distributions as you need them.”
Taking money from 401(k)s in installments is “cumbersome and, in many cases, not allowed,” says Ken Moraif, senior advisor at Money Matters in Dallas. “In an IRA, you can — and very easily. If you take an income stream, you probably want to roll it into an IRA and set up monthly withdrawals that fit your budget. An IRA does give you more flexibility. “
Says Nydick: “When it comes to distributions, I would lean a little more to an IRA. You have more control and you have an adviser or an 800 number. It’s much easier to change things around and customize.”
3. Your company may want you to take your money “When you leave your 401(k) with a company you no longer work for, you have also left them with the administrative cost of handling your account,” says Moraif. “They don’t want to be your bookkeeper and custodian for all these things. At some point, they may encourage you to move your account away.”
4. You can get personalized advice Most financial services firms offer free advice to IRA rollover customers, usually through an 800 number. “You want to get good advice,” says Nydick. “The value of good advice picking and choosing your investments, is high. When markets get volatile, you’ll have someone who can walk you through it and keep you on course.”
5. You can get an annuity option People looking for guaranteed income in retirement may want to put some of their savings in an annuity. You can do that with a rollover IRS but many employers don’t offer an annuity option in their 401(k)s. And even if yours does, there might be a question of portability of the annuity if you leave that employer, Nydick says.
What Not to Do With Your 401(k)
Whatever you do, says Houston, don’t cash out your 401(k) money. “My number one piece of advice is this — keep it in the plan, roll it over into an IRA or convert it to lifetime income, but please do not cash it out,” he says. “People say ‘I want to [use the money to] buy a car.’ All you’ve done is mortgaged your retirement future. It’s bad math and it doesn’t end well for that participant.”