Converting Your 401(K) To An IRA: Pros And Cons

Do you have a 401(k) through your employer? If so, it may be time to consider a direct rollover to an IRA.
In the world of retirement account rollovers and conversions, the 401(k) to IRA transition is a popular and potentially lucrative move that should be considered by anyone with investable assets sitting in their employer-sponsored 401(k).

Though it is a common rollover move for many, you shouldn’t blindly walk into the transaction without thoroughly considering the pros and cons of the conversion. Moving your retirement funds into an IRA – especially a gold IRA, may be one of the smartest moves you can make to safeguard your future.

Greater Diversification

PRO: Have you ever noticed that most employer-sponsored 401(k) plans offer little choice when it comes to deciding how to invest your money? You might find two or three mutual funds or a couple of “retirement age-target” funds that aim to balance your risk tolerance with your estimated years until retirement. IRAs allow you to pretty much put your money wherever you prefer – REITs, precious metals like gold, silver, or platinum, stocks, and more. If you value diversification and greater control over your investable assets, IRAs are the way to go.

CON: Greater diversification also may carry some additional risk as you might be tempted to invest in higher risk/greater return ventures. Remember, 401(k) fund managers are pretty conservative, while your ability to put your money where you please may work out – but it may also put you at greater risk of losing part of your fund.

Additional Loopholes for Early Withdrawal

PRO: There are times in life where you simply need to access some of your retirement funds in order to work due to a financial hardship or complete new investment entirely. IRAs often allow early distributions without incurring penalties (though you’ll still have to pay taxes on the amount taken out) for expenses like a first-time home purchase or higher education.

CON: Though IRAs do provide a little more flexibility in terms of accessing retirement funds, a 401(k) can be accessed if the account holder can demonstrate a financial hardship as defined by the IRS. With the IRA being easier to access – even if you’re not necessarily in dire financial need, the temptation to use retirement funds to “fill in the gaps” in one’s lifestyle may be far too appealing for some. The trick is to use restraint and understand that even a small withdrawal from an IRA can end up costing thousands over the life of the retirement account when you factor compound interest and account growth.

Better Investment Management

PRO: Try getting investment advice or knowledgeable counsel from your 401(k) administrator – you may find that high-quality information and guidance is glaringly absent from the menu of services offered by the firm. Part of this is due to the limited scope of investable options with most 401(k) plans, versus the much wider selection of plans available to those with funds in an IRA. You’ll find that advisors are much more apt to talk to you and provide intelligent solutions with an IRA account versus a 401(k).

CONS: For those with aspirations to grow their IRAs as fast as possible, some advice may be too tempting to ignore. And, you’ll pay for this type of guidance. A 401(k) is designed to position the account holder with a specific amount of retirement funds at a certain time in the future. Conservative? Yes. Fairly safe? Absolutely.

Converting a 401(k) to an IRA is a financial transaction that is more common than you might think. IRAs offer serious investors the freedom and latitude to make more informed and flexible decisions about their future, and eliminate many of the constraints seen with traditional 401(k) programs. For more information about IRAs – including gold IRA accounts, contact American Bullion today.

Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.