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  • Writer's pictureSamantha Diggs

Rollover 401(k) to a Traditional or Roth IRA? Think Again.

Updated: Sep 13, 2023

If you are changing jobs, you may be faced with the decision of what to do with your 401(k) from your previous employer. One option you may have heard of is to rollover your 401(k) to an IRA, but this isn’t always the best choice. In fact, there are several reasons why rolling over to an IRA may not be the smartest move. So, if you're thinking you need to rollover 401(k) to an IRA, we highly recommend considering the following:

Rollover 401k to an IRA? 5 Reasons to Reconsider

1. Higher Fees and Worse Returns

When it comes to investing, fees can eat away at your returns over time. A study conducted by the Center for Retirement Research revealed that IRA investors tend to pay much higher fees compared to those with 401(k) plans, substantially impacting overall investment returns. The study found that over a 12-year period, 401(k) plans saw nearly 41% greater returns than IRAs.

2. Say Goodbye to Early Retirement

Early retirement is a dream for many individuals; however, rolling over your 401(k) to a Traditional or Roth IRA can make this dream more difficult to achieve. With a 401(k), you have the flexibility to access your funds before the age of 59.5 for certain circumstances, such as a first-time home purchase or medical expenses. On the other hand, an IRA restricts early access to your funds under the danger of having to pay a 10% early withdrawal penalty.

3. Lack of Legal Protection

While 401(k) plans are protected by federal law, IRAs have limited legal protection and are shielded only by state law. This means if you choose to rollover 401(k) to an IRA, you may be exposed to potential risks and lack the legal protection that a 401(k) provides. By keeping your funds in a 401(k) plan, you benefit from the comprehensive federal protections that safeguard your retirement savings.

4. IRA Advisors May Not Have Your Best Interest in Mind

Not all IRA advisors are fiduciaries; therefore, they may not be legally bound to act in your best interest. When you have a 401(k) with your employer, they have a legal obligation to act as fiduciaries and prioritize your best financial interests. Additionally, when fiduciaries work with third party administrators--like the ones at RPCSI--that have earned the SEAL of Excellence from the Centre for Fiduciary Excellence (CEFEX), you can rest easy knowing you're receiving industry-leading care.

5. Loss of Greater Buying Power

Company-sponsored 401(k) plans have the advantage of being able to purchase funds at institutional pricing rates, which usually does not apply to IRAs. This means that if you choose to rollover your 401(k) to an IRA, you may miss out on the opportunity to invest at the lower costs offered by your employer's plan.

The Smarter Option – Rolling Over to Another 401(k)

Considering the potential downside of rolling over a 401(k) to an IRA, it becomes clear that there's a better solution available: rollover your retirement account to your current employer's plan. By doing so, you can circumnavigate the issues discussed above and benefit from the ease of managing a single account. This approach allows you to make the most of your retirement savings while simplifying your investment management. Learn how to rollover a 401(k) to a new employer.

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