You can have credit and bankruptcy protection by leaving your funds in a 401 K, as protection against creditors varies by state according to IRA rules. Loan options are not available. For the vast majority of 401 (k) plan participants, in my experience, it doesn't make sense to transfer their 401 (k) plan balances from a previous employer to an individual retirement account or IRA. Most 401 (k) plans offer investment options in guaranteed or stable value funds as a safe option, rather than money market funds.
Money market fund yields have been well below stable value or guaranteed interest rates for many years. The performance differential is likely to continue. In a 401 (k) plan, not only is the employer required to be a fiduciary, but the investment advisor associated with the plan is also likely to be a trustee. According to the Center for Retirement Research, the average return on an IRA over the 12-year period of their study was 2.2%.
The average return on a 401 (k) plan account over the same period was 3.1%. Although neither of these refunds will allow anyone to retire early, there is a huge difference between the two. The return achieved by 401 (k) plan participants was almost 41% higher. The main reason cited in the Center for Retirement Research study to explain why the yield differential between 401 (k) plans and IRAs was so large was that IRA investors paid much higher fees.
The average 401 (k) plan participant considering a reinvestment has limited options for obtaining objective investment advice. Advisors at large brokerage firms are conflicted because of their desire to generate transaction fees and recommend investments that pay them well. However, most 401 (k) plan participants can receive objective investment advice from the advisor attached to their 401 (k) plan, at no cost. Nearly all 401 (k) plans use low-cost institutional or R6 stock classes.
The difference in cost is at least. Your 401 (k) account balance is protected against garnishment by creditors if you file for bankruptcy. In addition, your 401 (k) balance cannot be included in any lawsuit. IRA account holders who retire and withdraw money before age 59 and a half are subject to a federal penalty of 10% and possibly also to a state penalty for early withdrawal.
It's almost always a good idea to transfer your previous employer's 401 (k) balance or IRA to your current employer's 401 (k) plan, for all of the reasons described above. As a result, I believe that most investors make poor decisions when they decide to transfer their accounts from the 401 (k) plan to IRA accounts. What should you do with the 401 (k) plan you've faithfully contributed to for years? Conventional wisdom says you need to transfer it to an Individual Retirement Account (IRA) and, in many cases, that's the best course of action. But there are times when a reinvestment is not the best option.
Let's look at five of those situations and the reasons to keep your 401 (k) plan or, if you're a public employee or nonprofit, your 403 (b) or 457 plan in effect in your now former employer's plan. Company 401 (k) plans can purchase funds at institutional prices, which is usually not true for IRAs. You'll have to pay taxes on shares withdrawn from your 401 (k) plan at the exchange rate in your current category. However, the tax is based on the original purchase price that you won't pay for any profit on those shares until you actually sell them (and then you'll pay at the capital gains tax rate, which is lower than the income tax rate).
This is known as net unrealized appreciation (UA). Money deposited in a 401 (k) plan is protected by federal law against virtually all types of creditor judgments (except IRS tax liens and, possibly, spousal or child support orders), including bankruptcy. IRAs are only protected by state law, whose power of protection varies. In fact, once you leave, you may be able to withdraw money from your 401 (k) plan several times a year (the employer sets the rules on the number of times people in this age group can withdraw funds).
You lose this privilege once you transfer your 401 (k) to an IRA and you'll have to wait until age 59 and a half to access your money without penalty. However, once you start paying for the SEPP, it must continue for a minimum of five years or until you turn 59 and a half years old, whichever comes later. If you do not comply with the requirement, you will be fined 10% in advance and you may owe fines from previous tax years if you have made distributions. The company's 401 (k) plans have access to a special type of fund called a stable value fund.
These funds, which are not available on the individual market, are similar to money market funds, but tend to offer better interest rates. If you want to take advantage of these risk-averse vehicles and your 401 (k) plan offers them as an option, don't hesitate to follow your current plan. When you and your job separate, deciding what to do with your retirement savings is an important decision. Transferring a 401 (k) plan may be the best option for you in most cases, but there are reasons why leaving the money in the company fund might work better.
You don't have to withdraw RMDs from your 401 (k) plan at the company where you currently work. Just make sure that the new plan's rates are not worse and that the investment options are comparable. This could be lower than the normal income tax treatment you would face if the stocks were switched to an accumulated IRA and then withdrew. For the 401 (k) plan distribution to be tax-free, you must transfer the amount of the check and the 20% withheld to your IRA within 60 days.
In that case, if they have already transferred the money to an IRA and need access to it, they will end up paying the 10% penalty, unless they otherwise qualify to withdraw money early. As a result, account holders reinvested in IRAs not only invest in higher-cost funds, but are also likely to incur transaction fees for purchases and sales. Transferring your 401 (k) to an IRA helps you save for retirement and has a number of benefits, but there are also a few reasons why it might not be the right decision for some people. Direct reinvestment is the most common and recommended method for converting your 401 (k) funds into an IRA.
With an accumulated IRA, you have the option of consolidating your old retirement accounts into a new IRA and potentially avoiding a taxable event. . .