8 Reasons to Rollover a 401k to an IRA

One of the most common reasons to rollover a 401k to an IRA is a job change. That’s really the only “good” reason that I can think of, because, generally speaking 401Ks offer more advantages than traditional or Roth IRAs.

The advantages of a 401(k) include the following:

Higher annual contributions

Employer matched contributions

Deductions are typically “automatic” from the individual’s paycheck, making savings easier and more likely

With a traditional account, you can only contribute $5000 per year in 2008. With a 401-k, you could contribute as much as $15,500 and your employer could match that contribution. Typically, your contributions are deducted from your paycheck BEFORE taxes, which lowers your state and federal income taxes for that year.

Roth accounts have some advantages over a traditional 401(k), since qualified distributions from a Roth account are tax free and account owners are not required to begin taking distributions when they reach the age of 70 1/2. But, as of January 1, 2006, you have the option of converting to a “Roth-401k”. That account type combines the advantages of both.

If your reasons to rollover a 401k to an IRA have anything to do with wanting more investment options, you are probably interested in a truly “self-directed” plan. Only a few custodial companies offer self-directed investing, but those that do offer the traditional, Roth and 401-K plans.

A self-directed plan can be invested in real estate, tax liens and other less traditional, but higher yielding items. Most of the things, that your account cannot be invested either fall under the category of antiquities or collectibles. There are some prohibited transactions that apply to all approved plans and it pays to learn about them.

One of the reasons to rollover a 401k to an IRA might be the desire to self-invest, but instead of rolling it over, you might want to simply “transfer” the fund. Some assets may not be transferrable, but for the most part, a transfer is less complicated and less likely to “go wrong” than a roll-over.

If you were looking for reasons to rollover a 401k to an IRA, of a more traditional type, I may not have given you much to think about. But, let me make it up to you, by giving you something else to think about.

Historically, the average earnings in stocks and mutual funds have not exceeded 8% per year. In the last year, accounts that were heavily invested in the stock market lost an average of 20%.

Certificates of deposit earn less than 4%. Government bonds and treasury notes earn less than 2%. Those returns were not too bad if you estimated that the annual inflation rate would be around 3%, but now we have to expect a 5% annual inflation rate. So, you need to earn more. You can only do that if you choose self-directing and the real estate market. Your reasons to rollover a 401k to an IRA might be different, but hopefully this helped.