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[work article] 401k Rollover: Should I Roll my 401k into an IRA?

October 1, 2010
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Below is a good article about IRA options.

401k is your retirement fund and it needs to be seated at some managing companies. When at your company, your company will contract another “company” to manage your 401k.

If you leave the job or your company shuts down, your 401k  could still be managed by the contracted company if only it still survive. What if the contracted company closes? If you don’t pay attention and move your 401k fund out quickly enough to another place, you lost your money!

What is IRA? It is Individual Retirement Account. What is that?
Nothing fancy, how about a bank manages your 401k for you? The article below reviews about IRA options.

401k Rollover: Should I Roll my 401k into an IRA?

If you’ve left a job recently, that’s one of the big questions you have to answer.

Luckily, with very few exceptions, the answer is easy: Yes, rollover your 401k.

Better Investment Options in an IRA

There’s no question that reducing your investment costs is one of the most reliable ways to improve your investment returns. Unfortunately, 401k plans tend to have only one low-cost investment option: an S&P 500 index fund. (And some plans don’t even have that much!) This forces you to either:

  • Use subpar (i.e., high-cost) mutual funds for the remaining portions of your portfolio (bonds, international stocks, small cap stocks, etc.), or
  • Overweight the S&P index fund in order to keep costs down (thereby throwing your asset allocation out of whack).

With an IRA, you’ll have access to a wide array of low-cost investment options in every asset class.

Better Access with an IRA

Over the years, I’ve had several people contact me about how to find “lost” 401k accounts. (This happens when an investor moves after changing jobs and does not inform the 401k administrator as to his new address. Meanwhile, the investor’s previous employer changes plan administrators, thereby making it so that neither party knows how to get in touch with the other.)

By rolling your 401k into an IRA, you’ll avoid any such hassle.

Lower Fees in an IRA

In addition to limiting you to high-cost funds, most 401k plans include an administrative fee. A 2009 study by Deloitte and the Investment Company Institute found the median admin fee to be 0.72% of assets annually.

In contrast, many brokerage firms charge no annual IRA fees at all. (And the rest tend to be quite modest–usually around $30/year.)

It’s likely that you can reduce your total investment costs by 1% per year simply by moving your money from a 401k to an IRA. Improving your investment return by 1% per year has a dramatic effect over a few decades.

Choosing an IRA

Of course, it’s important to find a brokerage firm that has low costs and that will give you access to the investments you plan to use. A few of the more popular low-cost places to open an IRA include:

Scottrade: No annual IRA fee. Access to low-cost investments via ETFs. $7/trade. $500 account minimum. (My review of Scottrade.)

TradeKing: No annual IRA fee. Access to low-cost investments via ETFs. $4.95/trade. No account minimum. (This is who I use. You can see my review of TradeKing here.)

Vanguard: No annual IRA fee. Access to tons of no-load, low-cost index funds. Most of the funds have a $3,000 minimum.

Zecco: $30 annual IRA fee. Access to low-cost investments via ETFs. $4.50/trade. No account minimum. (And if you have $25,000 or more in your account, you get 10 free trades per month.)

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