Will rolling over my 401k into an IRA result in higher investment returns?

Answers

  • 8 out of 8 people found this answer helpful

    CRPC Palo Alto, CA

    The short answer is No.  The 401k and the IRA are both accounts or arrangements which hold funds intended for retirement and have the same tax benefits.  But typically the 401k is more restrictive in the investment options since it is provided by your place of employment and usually limits your investment options.  For this reason the IRA may be a better option if you do not like the choices provided by your particular 401k.  One benefit of a 401k is that IRAs are not as well protected against lawsuits as are funds in a 401k.

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  • 9 out of 10 people found this answer helpful

    CFP® Fair Lawn, NJ

    When rolling over to an IRA, do it smart!

    The best way to rollover your 401(k) to your IRA, contact your 401(k) plan administrator and tell them you want to do a ‘Direct Rollover’ to your IRA.

    They will make your distribution check payable to the new IRA custodian. For example, payable as “Charles Schwab F/B/O John Smith IRA” and mail it directly to the receiving custodian or to your home. Do not sign the check. The custodian signs it.

    After Tax in a 401(k) to IRA

    The portion of the benefit that represents after-tax contributions should not be rolled over in most cases, to avoid being subject to the IRA recovery rules. Instead choose to rollover all but the nontaxable amount.

    401(k) Rollover Mistake – 20% Withholding

    If your intention is to roll over to an IRA and request that a check be made payable to yourself (an indirect rollover), this will be reported as a taxable event, even if you intend to roll it over within the 60-day time limit to avoid tax penalty.

    You will receive a check less the 20% mandatory federal withholding tax. When it’s time to complete the rollover, you need 100%. This means you’re 20% short. You must come up with the 20% within the 60-day time period that began running when you received the check from the company plan. If you can’t come up with the money, you will owe federal tax on the 20% plus a possible 10% early distribution penalty.

    If you deposit the total amount in your IRA of the withdrawal within 60 days by making up the tax, you can recover the withheld taxes when you file your return. But, you have to come up with additional cash to make up the difference.

    IRS can grant relief with a private letter ruling (PLR) giving taxpayers more time to complete the rollover, but PLRs are costly and time consuming. To receive a favorable PLR, there must have been a true intent to do a rollover.

    Best option: Avoid 60-day rollovers and instead,  do a trustee-to-trustee transfer, also know as a Direct Rollover, whenever possible.

    The direct rollover eliminates rollover problems. Direct Rollover transfers mean no one is touching the money in-between which eliminates the 60-day problem.

    Will the rollover result in higher investment returns?

    Your former employer is not going to watch it. Roll to IRA for more control and easier access to your money.

    • You’ll have a broader array of investing options.
    • IRAs provide more flexibility for non-spouse beneficiaries, and may allow them to stretch distributions over a longer period of time.
    • It’s a non-taxable event. It’s a direct rollover.

    Putting together a portoflio with thought and care may result in better returns.

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  • 4 out of 4 people found this answer helpful

    CFP® El Cerrito, CA

    Not necessarily.  However, it will almost certainly allow you to have more investment options, which logically could help you experience better investment performance.  However, there are no guarantees that it will improve your performance.  There are other considerations to weigh as well in making the decision to rollover or keep your 401(k) assets with your former employer that may be just as important.  Below are some of the pros and cons for each decision:

    Pros for keeping your 401(k)

    + Some plans allow distributions at age 55

    + Some plans allow loans up to 50% of balance-though not recommended

    + Possibly better credit protection (but varies by state)

    + Rollover to another 401(k) at new employer may be allowed

    Pros of Rollover IRA

    + Better control over investment choices and custodians

    + Beneficiary may be able to “stretch” distributions

    + May take early distributions with IRA 72(t) option

    + IRA’s can be consolidated into one account

    Cons of Keeping your 401(k)

    - Limited investment options more typically

    - Employer may mandate rollover if no longer employed, or balance below a certain amount

    - Unpaid loan balances could make taxes due of rolled over and loan not repaid in full within 60 days (considered distribution, and taxed at ordinary income rate, which could push you into a higher tax bracket)

    - Generally higher administrative costs with 401(k) vs. IRAs

    - May be penalties for rollover/withdrawal from plan for certain period of time if there are back end sales charges, also called Contingent Deferred Sales Charges (CDSC's)

    Cons of Rollover IRA

    - No loans from IRA's allowed - considered distribution

    - May be tax problems if done incorrectly

    - May not be creditor proof (but varies by state)


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  • 3 out of 3 people found this answer helpful

    CFP® El Segundo, CA

    While there is no guarantee, rolling over your 401(k) into an IRA should result in higher investment returns simply based on the investments available in each account.  Most 401(k) plans have a few dozen mutual funds to choose from and some offer limited asset classes to diversify into.  Investing in an IRA will give you access to tens of thousands of options including equities, specific sectors, and alternative investments that can increase your return and limit your downside.

    The key to all of this is knowing what to do with these additional options.  The average investor
    does not know how to properly allocate and monitor their portfolio so professional advice is recommended to take full advantage of what the IRA offers. 

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  • 4 out of 5 people found this answer helpful

    CFA, CPA San Francisco, CA

    I would answer "most likely" and give three reasons why:

    (1)  Most 401k plans over-weight U.S. equities, a flaw that falls into the category of "familiarity bias."  It is especially problematic when employees naively allocate equally to the funds offered.

    (2)  Most 401k plans omit most asset classes other than equities and U.S. fixed income.  Real estate, MLPs, high yield, floating rate funds, foreign fixed income, preferred stocks... are some of the asset classes that 401k plans generally do not include.  Some do not even have emerging markets equity.

    (3)  Most 401k plans do not offer advice to the plan participants, so individuals are left to choose their own asset allocations or opt for high-cost "lifestyle" portfolios.  It is rare that I meet a client whose 401k account is appropriately allocated and well-diversified.

    If one agrees with the statement that asset allocation is the most important factor in determining investment returns, then each of these factors is  an independent reason to roll over plan balances whenever possible.  

    I am aware of the argument that (some) 401k plans offer access to low-cost institutional share classes, but I have yet to encounter a situation where this benefit outweighs the other explicit and implicit costs of keeping money in the plan.  On the other hand, I have observed on many occasions that smaller companies have 401k plans that are terrible in multiple respects:  high fees, lousy funds, and poor diversification.

    If short, by rolling over their accounts to an IRA, most people should be able to improve their investment performance --- increasing return for the same level of risk, or decreasing risk for the same level of return --- compared to their 401k investment options.  

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  • 2 out of 2 people found this answer helpful

    CFP®, ChFC, EA Redwood Shores, CA

    Not any more than moving your wallet from you left pocket to your right pocket will increase the amount of money in it.

    However,  having access to more investment instruments, professional advice, and paying closer attention to what is going on inside that account all have a good chance of improving your returns.

    In my professional experience, rolling 401(k) funds into an IRA and integrating it into the overall plan benefits most investors over the long haul.

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  • 3 out of 4 people found this answer helpful

    CFP® Berkeley, CA

    In general, no, your investment returns should be no different between the two retirement plans.  Both are simply tax deferred investment accounts. 

    There could be a difference in fees, however, as a company 401k plan will sometimes have negotiated lower management fees on the mutual funds in the plan and the company may subsidize the administration fees that the 401k plan pays.  Larger companies often have the pricing power to get better terms for their retirement plans.  By the same token, sometimes companies pass on administrative fees to their employees so that the cost of the 401k plan could be higher than the IRA.  It depends on the specifics of the 401k plan you are leaving vs. the IRA you are planning to roll into.


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  • 4 out of 6 people found this answer helpful

    AIF®, CFP® Pleasanton, CA

    Yes, you could earn better returns in an IRA than a 401k.  Here's why:

    1. Lower costs - A 401(k) has administrative expenses that an IRA doesn't, and many of those expenses are often passed on to the participants. You won't incur many of these expenses in an IRA.

    2. No proprietary funds.  Have you ever noticed that if your 401(k) is administered by John Hancock or Fidelity, there are a lot of John Hancock or Fidelity funds available?   That's because they aren't choosing the best of breed investments from the entire universe of funds, they're selecting funds from their own company.  Many fund companies have a 401(k) business just to push their own funds.  Not all plans do this, but the majority still do.  Look at your plan carefully to assess it.

    3.  More effective investment strategies.  401(k) accounts typically have mutual funds and exchange traded funds - and some have annuities. While there are many funds available, you can invest in more advanced strategies to protect your downside in an IRA that aren't available in a 401(k). Structured notes and direct real estate ownership are two quick examples.  You can also structure your portfolio to have a better up capture ratio than a down capture ratio, providing higher compounded returns through all the ups and downs in the market.

    If you take the exact same investments and move them from a 401(k) to an IRA, the only performance difference should be the higher administrative costs of the 401(k).  However, with a broader array of investment types and strategies available in an IRA it is possible to increase the potential returns.

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  • 1 out of 1 person found this answer helpful

    CFP® San Francisco, CA

    It depends.   There are some employer plans that are very highly rated according to criteria set up by the 401k rating service Brightscope.  Check your plan rating on their website.  The advantages of keeping your 401k with your previous employer and not rolling them over are 

    1.  you can roll or combine it with your current 401k for simplicity of management.  

    2.  401k's have a higher protection standard against being sued as mentioned in another answer although IRA now have protection against creditors up to $1 million in California.

    3.  The costs for investment management might be lower than an investment advisor's fee for assets under management if the 401k is using low cost index funds from providers such as Vanguard or Fidelity.  If your advisor is using actively managed mutual funds and charging an assets under management fee in addition costs for investment management at an RIA might be more expensive than the 401k.

    4.  Fewer choices for investments making decisions and management easier.

    5.  The new cost and expense disclosure rules have made the 401k, 403b and other defined contribution plans more transparent although the disclosure documents are often hard to understand for the plan participant.

    Advantages of rolling into IRA

    1.  More investment choices.

    2.  Easier to integrate into the rest of your investment management portfolio.

    3.  If you already have a traditional IRA it is easier to have assets managed under one umbrella instead of getting many statements.

    4.  It is easier to convert traditional IRA assets to Roth IRA accounts.

    5.  Easier to convert into inherited or "stretch" IRA for estate planning purposes.

    As far as resulting in higher returns the main factor for higher returns in any account would be lower expenses.


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  • 3 out of 6 people found this answer helpful

    Blue Bell, PA

    Funds in an IRA will enable you to purchase individual high quality bonds. High quality bonds will return invested principal when the bonds come due. They will provide consist cash flow. If interest rates rise, you will be able to reinvest the cash flow at the higher rates. Rising interest rates are the upside for individual bonds.

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