Have you thought about what your retirement money is doing lately? If you haven’t, you certainly aren’t alone. Your retirement savings account is critical for your financial future. But unfortunately, many people don’t really think about where they’re putting their retirement funds. While most people stash their savings in a 401(k), few people think about whether or not that’s really the best investment option. And there are other account types that are worth considering.
Americans use 401(k) accounts more than any other type of savings account when it comes to retirement. Since the late 1970s, the 401(k) has become the most popular retirement plan in the country. But what if you could actually reap bigger benefits by leaving your 401(k) behind?
What is a 401(k)? It’s a retirement savings account that allows employees to put a percentage of their salaries into long-term investments like funds and stocks. And there’s a lot to like about a 401(k) – these accounts are offered by many employers, come with tax benefits, are flexible, and allow you to save long-term. Plus, many employers will match their employees’ contributions up to a certain percentage.
But 401(k) accounts aren’t your only option when it comes to retirement. In fact, for some people, an IRA might be a smarter choice.
401Ks Versus IRAs
Though a 401(k) and an IRA share some similarities, these two types of retirement savings accounts are pretty different.
A 401(k) is a savings and investment account you contribute to directly out of each paycheck. Your contributions are pre-tax, and the entire account is tax-deferred. You won’t be taxed until you begin withdrawing money from your 401(k). Each time you contribute money to your 401(k), that money is invested into a number of different mutual funds based on your chosen risk level. You can decide if you want to invest in conservative or riskier funds.
IRAs are also tax-deferred savings and investment accounts.. They’re usually broken down into two common types: a traditional IRA or a Roth IRA. While some IRAs can be offered by employers, IRAs are generally held by banks or brokerage firms. When you contribute to an IRA, you have more investment options and flexibility, and you can choose to invest in different ways. You can put your money in stocks, funds, bonds, CDs, and even real estate.
While 401(k) accounts are generally offered by employers, IRAs are typically separate products. You can actually open an IRA on your own – but you can’t open a 401(k) without your company offering that option.
So, while both 401(k)s and IRAs are tax-deferred savings accounts specifically designed for retirement, they do work in different ways. And in some cases, a 401(k) can be more limiting – which might limit your money’s potential growth.
Why It’s Time to Consider Rolling Your 401K Over to an IRA
It is possible to take the funds out of your 401(k) account and open an IRA. This move is called a 401(k) roll over, and it can be a smart money move.
Commonly, people roll over their 401(k)s when they change employers or retire. But you can also roll your 401(k) over if you’d like to take advantage of what an IRA offers. You don’t have to wait until you’ve found a new job – you can roll over your funds right now.
And there are plenty of perks that come with turning your 401(k) into an IRA, including:
- Access to more investment options and choices.
- A lower investment cost (though this varies).
- Cheaper or free account fees.
There’s another great perk to rolling your funds into an IRA. Banks and brokerage firms will actually give you special deals and incentives to do so.
You can actually make money when you roll your 401(k) into an IRA. For example, Prudential is currently offering up to $599 in free money if you roll over a 401(k) into a Prudential Managed Account. The cash bonuses start at $100 for a $10,000 initial investment. And TD Ameritrade is offering even more – you can earn up to $2,500 for rolling your 401(k) over into a TD Ameritrade IRA.
With bonus offers like these, right now could be a great time to begin the roll over process for your 401(k).
How to Roll Over Your 401K
If you’re interested in taking advantage of all the benefits of an IRA, including brokerage cash offers, the process is simple and straightforward. You just need to follow these steps.
Choose a Brokerage
Your first step should be deciding where you’re going to send your retirement savings. To do this, you’ll want to search for and compare different brokerage options. Read reviews, look at the different types of accounts offered, and see if any brokerages meet your specific needs. You should also get information about any requirements, such as a minimum balance, investment fees, or other costs.
Decide How Your 401(k) Funds Will Be Invested
Once you’ve picked a brokerage, you’ll need to make investment decisions. When your 401(k) funds are rolled over, they’ll be re-invested. And you can either make your own investment decisions or have a financial advisor make them for you. Do some research into the available options within your new IRA, and decide if you’d like the funds to be invested in stocks, mutual funds, ETFs, or other options.
Set Up Your IRA With Your New Brokerage Firm
Next, you’ll need to actually open your IRA. When you start this step, you’ll need to provide information about the funds you’re rolling over. Determine if you need to make any immediate investment decisions, if there are deadlines you need to meet, and if there are costs to pay. Make sure to ask your new brokerage how they’d like the 401(k) funds transferred – some require a check, some rollovers can be done online, and others are more complex.
Contact Your 401(k) Administrator
When your IRA is ready to accept funds, your final step will be to contact your 401(k) administrator. You’ll need to contact this organization to get your funds released, close your account, and handle any last responsibilities with your 401(k) account.
Once these steps are completed, you’ll have your old 401(k) rolled over into a new IRA. Make sure to check with your new brokerage to make sure you meet all of the requirements for any bonus offers, and that your funds are allocated properly. From there, you’ll be able to enjoy all the benefits that come with saving for retirement via an IRA.