Comparing 401k Rollovers to IRAs: New vs. Existing
When it comes to managing your retirement savings, deciding whether to roll over a 401k into a new or existing IRA can be complex. The best approach largely depends on your specific circumstances.
Proper Approaches at Different Stages of Life
Active Employment
During your active employment, it is generally recommended to roll your 401k into a new IRA rather than an existing one. If you later decide to return to the same employer, this money can typically be rolled back into their 401k plan. This strategy provides flexibility and additional benefits in terms of investment options and management.
Approaching Retirement
As you near retirement, it is often advisable to consolidate all your existing IRAs into a single account. This consolidation can simplify management and potentially enhance overall efficiency in optimizing your retirement funds.
The Advantages of Rollover
One of the primary benefits of a 401k rollover into an IRA is the wide range of investment options available. Unlike a 401k, where your employer’s choice of investment funds can be limited, you can choose to invest in FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) or low-cost ETFs such as Vanguard VGT, which has demonstrated strong performance over the years. For instance, an investment in Vanguard VGT over a 15-year period could yield a return of 14.3%.
In situations where your employer offers lower-performing or more expensive investment options, a rollover into an IRA can provide you with a broader array of choices, potentially leading to better performance and higher returns.
Key Considerations and Misconceptions
While many individuals and some experts focus on company-specific rules, whether to commingle funds, or the ability to roll funds back into a qualified plan, these factors are often irrelevant in determining the best rollover strategy.
Company Rules and Commingle Funds
Company rules or regulations do not dictate whether you should roll over your funds into a new or existing IRA. These rules cannot control where a distribution can be rolled over to, and commingling funds does not affect your ability to borrow from an IRA. It's important to note that you cannot borrow from any IRA, and the rules about rolling over to a qualified plan are now more relaxed and flexible. For instance, previously, only those IRAs to which no contributions other than rollovers from qualified plans had ever been made could be rolled over. However, this is no longer a relevant restriction.
Consolidation of IRAs
Whether you can roll an IRA back into a qualified plan like a new employer's plan is not affected by rolling the funds into an existing IRA. This means that even if you choose to roll your IRA into an existing account, it does not impact your future decisions to re-rollover into a qualified plan.
Some IRA custodians impose their own restrictions on rollovers to existing accounts, but these are administrative requirements specific to the custodian. These restrictions are just one of many factors to consider when determining the best transaction for you, such as the fees, investment options, and other factors that you would always consider when establishing an IRA.
In conclusion, understanding the differences between rolling over a 401k into a new or existing IRA involves considering various factors and circumstances. By doing so, you can make a more informed decision that best suits your financial goals and long-term retirement strategy.