Should You Roll Your Old 401k Into an IRA?

The answer is maybe. Let me say first that the following is not investment advice and everyone’s situation is unique. In our opinion, there are a few good things about 401k plans, but several not-so-good things too. I’ll tackle the good things first.

The Good

Company Match

This is by far the best feature of any 401k plan. Typically, companies that offer a 401k plan to their employees will offer a contribution match. For example, if the employee contributes 3% of their salary then the company would match that contribution to the plan. It’s a good deal! We definitely don’t want to leave free money on the table.

Tax Deduction

Contributions made to 401k plans reduce your current year’s taxable income. If you are having a big income year, it may make sense to up the 401k contribution to mitigate the increase in taxes you may experience. However, the IRS will still come for their cut whenever you do take the money out of the account.

The Bad

These two 401k drawbacks have cost people obscene amounts of money in lost profits and fees.

Investment Options

This is probably the most important downside to most 401k plans. The investment options inside 401k plans are typically limited to a small selection of mutual funds. Mutual funds can have high internal fees and lack the performance you may be looking for. Not all mutual funds are bad, there are definitely some good ones out there.

That brings us to the second part of the problem - the selection. The average mutual fund has 25 fund choices according to Morningstar.com. There are roughly 7,000 mutual funds available in the market, and you want me to create a portfolio out of only 25 options? It is much easier to create a great portfolio when you start with 7,000 options as opposed to 25. This is by far the number one reason to move money out of a 401k if you can.

Lack of Advice

In addition to less than ideal investment options, there is usually no one to advise you on which of these investment options you should choose. There are some very talented outside firms that can explain your investment options outside of the 401k and help point you in the right direction.

In summary

It’s difficult to make the case to not participate in your company’s 401k plan, at least up to the full matching amount. Free money is a beautiful thing. However, any contribution after that has limited benefits and all of the negatives. Keep in mind that when you leave a company, you lose both benefits while remaining fully exposed to the negative features of the plan. Do yourself a favor and reach out to a professional to see what your options are and how they compare to what you are currently doing.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Element Squared Private Wealth employees providing such comments, and should not be regarded as a description of advisory services provided by Element Squared Private Wealth or performance returns of any Element Squared Private Wealth client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Element Squared Private Wealth manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.