Investment & Financial Articles
Title: Rolling your 401k: Contributory IRA vs. Rollover IRA
Author: Ulli G. Niemann
Article:
In an ideal world you would start your working career with a
great company in your early 20s, steadily climb the corporate
ladder, retire at age 65, and draw a sufficient income from your
accumulated 401k account to live happily ever after.
Unfortunately, that's not how the real world works. If you are
like most people, you will change careers, or at least
companies, several times. Each time, you'll be faced with the
question of what to do with your accumulated 401k benefits.
You will likely have a few choices: keep your 401k with your old
employer (sometimes possible), roll the proceeds into your new
employer's 401k plan, or put them directly into a self-directed
IRA at a brokerage firm of your choice.
Since leaving your 401k with your ex-employer has no benefits
whatsoever and most employers will prefer you transfer out
anyway, that leaves only the last two as viable options:
1. Roll your 401k proceeds into the new employer's 401k plan of
(if allowed)
This is the most painless solution and the one that does not
require much decision making. While this is certainly
acceptable, there is a bigger picture.
The ultimate goal of having a 401k plan is to provide you with a
comfortable retirement. To accomplish this you really need a
wide variety of investment choices and the opportunity to move
among them in response to market variations.
Most 401ks are limited to maybe 15 mutual fund choices which
rarely change, even if market behavior dictates they should.
Additionally, the canned advice provided through plan sponsors
is generally not terribly useful.
The only benefit to this type of rollover is that if your plan
has a loan provision, you'll be able to borrow funds easily.
2. Roll your 401k proceeds into a self directed IRA
This is the preferable solution for most people, and with it you
again have two choices: roll your 401k into a "Contributory" or
a "Rollover" IRA.
Contributory IRA: Once you roll your proceeds into this type of
IRA, you may still contribute annually if you qualify (check
with your accountant). However, the 401k portion can no longer
be rolled back into another 401k with a new employer, should you
ever want to do that. So you eliminate the possibility of using
the loan provision with those funds. While it is possible to
borrow against an IRA, it's more limited than borrowing against
an employer 401k. Check with your tax preparer for details.
Rollover IRA: This type of IRA allows you the most flexibility.
You may roll the proceeds back into a 401k plan if you want to
utilize a loan provision. However, for tax reasons you should
not make annual contributions to this IRA. If making annual
contributions becomes important to you, simply open another
contributory IRA.
Since Rollover IRAs are usually set up at a brokerage firm,
you'll have access to their entire universe of mutual funds.
With this type of IRA, you can also employ an independent
investment advisor to manage the account for you. (Yes there is
a cost for that, but an effective advisor will more than make up
for that in greater returns than you would get without him or
her.)
Most of my clients have found that the investment results we've
obtained with their personal IRAs were far superior to those
yielded by their employer 401k plans or their personal investing
efforts. This has been mainly due to a combination of better
choices and a methodical approach to investing which has kept my
clients in the market during good times and out of it altogether
during severe declines.
Bottom line: Rollover IRAs offer opportunities to maximize
benefits and provide flexibility not usually available with
employer 401k plans.
About the author:
Ulli Niemann is an investment advisor and has been writing about
objective, methodical approaches to investing for over 10 years.
He eluded the bear market of 2000 and has helped countless
people make better investment decisions. To find out more about
his approach and his FREE Newsletter, please visit:
www.successful-investment.com
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