401(k) plans are a great vehicle for employees to accumulate retirement savings. 

If you’re eligible to participate in a current employer plan (including 403[b] or TSA) be sure to check out our earlier blog, Ideas to Enhance Your Employer Retirement.

Employer plans were created in the early 1980s because people were living longer and Social Security was covering less of retiree needs.  401(k)s are designed to leverage Congress’ incentives for American workers to save towards their own retirements.  

In Times of Change

However, once you’ve left that employer, it’s usually a good idea to “roll over” that money to an Individual Retirement Account, or IRA, for several good reasons. Besides the usually limited investment options in 401(k)s, they are not designed to distribute money in retirement.

Some employer plans limit how often you can take out money.  It may be quarterly or even mandate that to access cash, you have to take ALL the money, which mandates a rollover.  You also have less control in managing tax impacts, as 401(k)s have mandatory 20% federal tax withholding.  IRA tax withholding options are usually zero, or 10% – 99%.  Plan distributions are often mailed by check, versus IRA’s which can be linked to your bank account(s).

Keep in Mind

IRAs in general offer many more investment options, fewer fees, and greater distribution flexibility. But not all IRAs are equal, usually depending on the institution.  Bank IRAs, for example, typically only pay interest.  Mutual Fund IRAs are limited to the sponsor’s single fund family lineup and may have annual fees. Brokerage IRAs allow a full range of investments in stocks, bonds, and broad mutual fund lineups.

To further complicate things, not all brokerage firm IRAs are equal either. 

Some charge annual fees, which may be waived based on account size or investment activity, like paying stock commissions.  The most competitive firms are the large discount brokers, like Vanguard, Schwab, TD Ameritrade, and Fidelity. 

Again, if you plan to invest in individual stocks or across different mutual funds, make sure that you understand the firms’ commission and trading fee schedules.

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Because most investors buy when markets are exciting (high) and sell when markets are scary (low), 401(k)s are often a retiree’s greatest investment