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When you terminate your employment with your employer, you will have to decide what to do with the money you have saved in your employer’s retirement plan. With so many options, I know this can be a confusing task. Here are the three options you will face:
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- Cash-out of the plan
- Leave the money in the plan
- Rollover to an IRA (Individual Retirement Account)
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Cashing out of your former employer’s retirement plan can lead to disastrous long-term results. It is an action, down the road, most will regret. Because this mistake happens so often, most consider this mistake one of the top retirement planning mistakes to avoid.
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Though leaving your money in your former employer’s plan is a fine option, do not disregard the opportunity to roll your funds into a rollover IRA. A rollover IRA comes with its own set of strategic benefits, and when appropriately executed ensures you will not trigger any negative tax consequences.
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What Is a Rollover IRA?
A rollover IRA is like a Traditional IRA, except for the source of the money is not an annual contribution. Rollover IRA funds come from a previous retirement plan, such as a 401(k), 403(b), or 475 plan. You may open a rollover IRA for the purposes of rolling over your employer’s retirement plan funds without making any additional annual contributions.
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Below I will talk about the benefits and disadvantages of rolling over your employer’s retirement account into a rollover IRA.
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Benefits
Streamlining your investments
We are all human. And from time to time, we tend to forget things. In this day and age, employees are switching jobs every 3 to 5 years. Over time we can accumulate a lot of old employee retirement plans. Consolidating those old employer retirement plans can add a level of functional simplicity to managing your affairs.
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A tragic scenario is someone trying to do the right thing by saving for retirement and then forgetting about their money. Another scenario is an old 401(k) account holder dies, and their heirs have to go through a lot of trouble just to find all of their old employee retirement accounts.
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We will not even go into the technical side of money management and how having multiple accounts can become a problem. Things like apples-to-apples investment comparisons, distribution rules, and estate planning. At times it just makes more sense to consolidate your accounts.
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Gain access to more investment options
A rollover IRA opens more of the investment universe to you. Your employer’s 401k plan can practically only have so many options. Employer plan administrators try their best to select investments that meet most of their employee’s investment needs. But when it comes to tailoring a plan specifically to meet the objectives of an individual, rolling over an IRA can be the best move for you to diversify your investments appropriately.
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Lower investment cost
Consider yourself lucky if your employer provides a low-cost retirement plan option. Unfortunately, this is not the case for some employees, especially those working for a small to midsize company. I often see some plans loaded with outrageous fees.
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Over the past decade, investment brokers have competed to lower the cost of investing. As a result of this competition, those with an investment account outside of their employer’s plan can enjoy significate cost savings.
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In contrast, the employer-sponsored plans have not been so generous with cutting prices. The extra fees paid to mutual funds and account administration fees can put a hamper on your retirement savings.
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Disadvantages
Limited creditor protections
With all these benefits, you have to be thinking of why anyone would not rollover their IRA. Well, the Federal Employee Retirement Income Security Act (ERISA) shields 401(k)s in the event someone wins a judgment against you. An IRA Rollover provides some level of protection but not to the level of your 401(k). Creditor protection is a factor that needs to be considered, especially if you work in a heavily litigious field where being sued and having your personal assets at risk can be a problem.
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Conclusion
I understand there are a lot of things to consider when rolling over your employer’s retirement plan into an IRA. If you would like help with knowing all your options, please use the contact information below and schedule a consultation. My firm specialized in helping our clients understand the best options for them.
[sh_btn link=”https://calendly.com/deasil/15min” target=”_blank” shape=”squareRounded” style=”dimension” size=”extralarge” color=”rgb(27, 54, 156)” bordercolor=”rgb(11, 0, 0)” bordersize=”0″ fontcolor=”rgb(248, 247, 247)” enablehover=”enable” enableicon=”enable” iconbg=”square” iconset=”fontawesome” iconfa=” fa fa-calendar”]Schedule Your 15min Consultation Now![/sh_btn]Randall Avery
Financial Advisor │ Author │ Public Speaker
R.S.A. Deasil Advisors, LLC
Office: 531-333-2745
Email: Deasil@rsadeasil.com
Website: www.rsadeasil.com
P.S. If you would like me to speak at your next event, please click HERE
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While working with clients, Randall realized there was a missing process that individuals were not performing when choosing to use their money. Motivated to fill this gap, Randall developed three models to ‘Hack The System’ and allow individuals to Create Your Own System (CYOS). Randall hopes effectively using these models will help individuals identify the best moral and ethical use of their money.
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