Turning 59½ is a pivotal moment for retirement planning, as it allows you to take penalty-free distributions from your retirement accounts. If you're still working and participate in a 401(k) plan, this milestone might present an opportunity to consider an in-service withdrawal, providing access to broader investment options and further planning strategies. While 401(k)s are excellent savings vehicles during your career—thanks to company matches and low fees—choices become available when withdrawals without penalties are allowed.
You face a crucial decision: should your savings remain in your 401(k), or is it time to move them to an IRA? Three compelling reasons often guide the choice of rolling a 401(k) into an IRA. Firstly, it significantly expands your investment choice spectrum. While 401(k) plans often restrict options to a narrow selection, IRAs typically offer thousands of investments. This diversity helps tailor investments closely aligned with your unique goals and risk tolerance. Additionally, an IRA might present opportunities for higher returns compared to a typical 401(k)'s stable value fund.
Even a 2% increase in return could exponentially grow savings over time—imagine a $20,000 annual growth on $1 million savings, compounding over the years. The second reason is the potential for a Roth conversion. Unlike most 401(k) plans, IRAs allow for conversions into a Roth IRA. Given that current tax rates might be lower than future ones, converting now could be advantageous. Imagine converting $100,000: if you're in a 25% tax bracket now, you avoid paying more if your tax rate escalates to 30% later. Locking in today's lower rates could safeguard more of your retirement funds.
Lastly, transferring your 401(k) to an IRA enables access to professional investment management and financial advice tailored to personal objectives. While some employer plans may have limited advisory access, independent advisers often offer more comprehensive services, from retirement income planning and tax strategies to health care and estate planning. Finding a reputable firm that charges around 1% or less for such services might optimize your investments' performance.
Even if you move some of your 401(k) funds into an IRA, you can still contribute to your 401(k) and reap company matches. However, not all employers allow moving funds from a 401(k) while you're still employed, even after 59½. Review your plan's policies or speak with a plan administrator to confirm your options. As always, collaborating with an independent, reliable financial professional is advisable. Ensure they're committed to your interests and provide a broad range of services, so your retirement planning optimally supports your goals. Planning effectively today ensures a financially secure retirement in the future.
