This is the third in a four part series designed to help you determine the best way to proceed with your previous employer’s company retirement plans, including 401(k)s, 403(b)s and more. Part 1 | 2 | 3 | 4
Now that you understand at the pros and cons of leaving your 401(k), 403(b), or other employer sponsored retirement plan with a previous employer let’s take a look at another option, rolling over your retirement account(s) from your previous employer into an IRA.
The advantages of converting your retirement account(s) to an Individual Retirement Account (IRA) include:
- Opening your IRA with a discount brokerage to receive much lower transaction costs.
- More visibility of your current investments and more detailed record keeping.
- The ability to invest in thousands of different securities instead of just selecting from a pre-selected list of 5-15 options. This allows you to create a specific portfolio designed to fit your unique needs, not just be lumped together with 100’s to millions of other investors.
- In most cases much lower administration costs. In a self-directed IRA you may be able to greatly reduce your expenses by removing the extra administration fees present in your previous retirement account.
The disadvantages of converting your retirement account(s) are related to what is necessary to make it beneficial. This typically means:
- Creating an Investment Policy Statement to guide your investment choices.
- Conducting initial education/research of investments and tax implications.
- Actively monitoring the investments for necessary changes.
- Rebalancing regularly to ensure the allocation stays where it should be for your timeline and risk tolerance.
- Not selecting a lower cost investment as compared to your previous options.
In most cases the disadvantages of a rollover can be avoided if the right amount of care is given to your retirement account. While no one can guarantee that your investments will always have positive returns, there are steps that can be taken to significantly reduce your risk and potentially increase your return; especially those outlined above.
For some individuals this presents an exciting challenge as they enjoy taking the time to research, understand, compare and finally determine the direction of their own investments. For others this can be time consuming and they may wish to entrust this responsibility to someone else. If you don’t have the time or present knowledge to manage all of these factors then you may consider seeking out a professional, specifically one that is held to a fiduciary standard of care to their clients. Visit with a Financial Advisor in Omaha to learn more.
Read our final part of the series, Selecting Investments or an Investment Advisor to learn more about making investment choices within your Individual Retirement Account.
Author: Reuben Brauer, CFP®
Reuben is the Managing Director of Callahan Financial Planning and is a Certified Financial Planner™ practitioner serving clients in the Denver metro area in Colorado, in San Rafael, San Francisco, and Mill Valley in Northern California, and Omaha and Lincoln in Nebraska.