Why Are Retirees Leaving Their 401K Money With Their Former Employer's Plan?
My husband often playfully tells our 10-year-old daughter, Jillian, “It's your money! You get to decide what to do with it!” While it's light-hearted fun, it speaks volumes about Jillian's financial journey. She's been diligently saving for a “dream red car,” a sweet sixteen gift she hopes to purchase, courtesy of the regular contributions from her generous grandparents.
Under the guidance of a financially savvy adult, Jillian is learning to make informed decisions. As she steps into her teenage years, her priorities might shift from a shiny car to a college fund. But that will be her decision to make.
In stark contrast, it baffles me when grown adults relinquish control over their retirement savings when transitioning between jobs. This puzzling trend is not as uncommon as one might think. A 2019 Fidelity study highlighted that 55% of retirees left their retirement savings with their previous employer’s 401(k) plan for over a year after retirement. This was a significant jump from four years prior, when the figure stood at 45%.
Why are retirees choosing to let their funds rest in their former 401(k) rather than moving those into an Individual Retirement Account (IRA)? The reasons vary from satisfaction with the existing plan's investment choices and administration, comfort with digital access, no immediate need for funds, to perhaps a lack of awareness about transferring funds into an IRA tax-free.
Nevertheless, while it may be advantageous to retain assets in your former employer’s 401(k), there are compelling reasons to roll them over into an IRA, especially if you're on the brink of retirement. Now could be an opportune moment to assess your 401(k), which may be your most substantial retirement asset. Here are a few key considerations:
Evolving Investment Choices
Having a longstanding 401(k) plan, you're probably well-versed with its investment options, fees, and performance. However, recent modifications to your plan could introduce unfamiliar investment options with potentially higher risk. An unexpected hit to your retirement funds due to this increased volatility would certainly be unwelcome.
Typically, IRAs provide a broader range of investment options than most 401(k) plans, allowing you to tailor an investment strategy according to your evolving risk tolerance and goals. Although this isn't a universal rule for all IRAs and 401(k) plans, it's often the case that an IRA offers a more extensive selection of stocks, bonds, mutual funds, ETFs, annuities, and more.
Navigating Management and Administration
You might be at ease with the management and administration tools provided by your current 401(k) plan. With a user-friendly website and possibly a dedicated support person to guide you, it can feel effortless to review and make changes to your account.
However, consider the future – will it remain convenient to manage assets in your old 401(k) plan? Many retirees find themselves juggling multiple 401(k) plans from previous employers, along with IRAs and other investment accounts across various institutions. This can make strategy adjustments and overall management rather cumbersome. Simplify your life by consolidating your retirement assets into a single IRA.
Remember, upon turning 73, you'll be required to take minimum distributions (RMDs) from your 401(k) and IRA. If you're pulling distributions from several accounts, this could turn into an inconvenient task. Consolidating your assets into one IRA ensures you only need to withdraw from a single account to meet your RMD each year.
The Roth Conversion Option
Switching to an IRA opens up a compelling avenue for you – converting to a Roth account. Particularly if you own one of the increasingly popular Roth 401(k)s, transitioning to a Roth IRA might be an optimal choice.
Roth IRAs operate differently than traditional ones; you pay income taxes on your contributions the year you make them and then enjoy tax-free withdrawals later on. Plus, with a Roth IRA, you're free from the obligation of Required Minimum Distributions (RMDs) at age 73 or any other time, thanks to your upfront tax payment.
If your future self is likely to be in a higher tax bracket or if tax rates are expected to rise when you'll need your IRA funds, switching from a traditional account to a Roth — and accepting the present tax implications — might work in your favor. The path to Roth conversion can be complicated, so if there's a significant amount at stake, consulting a financial advisor to weigh your options would be advisable.
Bringing the discussion to a close, it's time to consider a strategic plan for your 401(k) assets. Remember Jillian's lessons – never be afraid to take control of your financial destiny. Embrace the options available to you, and seize the reins of your retirement savings.
Krista McBeath is an Investment Advisor, Chartered Financial Consultant, a Licensed Insurance Advisor, a Fiduciary, and an experienced tax advisor who specializes in financial planning, investments, and insurance. She utilizes advanced tools for in-depth calculations that analyze tax and retirement scenarios to help her clients avoid a future tax time-bomb. Whether this means enjoying more of your hard-earned money in retirement or passing along assets to loved ones with less tax burden, planning makes the difference.
Her Amazon best-selling book, The Generational Wealth System outlines a holistic approach to preserving lifestyle, wealth and legacy.
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