Disclaimer: We are reader supported. We may be compensated from the links in this post, if you use products or services based on our expert recommendations.
In the world of personal finance, almost every action has both positive and negative results. The goal for individuals and their financial advisors is to make accurate lists of all the pros and cons associated with each decision. People planning to purchase vacation rental properties might discover that the potential extra income and lucrative tax write-offs are counter-balanced by repair and maintenance expenses.
Everything is a balancing act, in other words. What about retirement plans, like 401k's and IRAs? Millions of working adults have 401k accounts through their employers. At any time, these individuals can decide to move some or all of the money in the 401k into an IRA. They do so for all sorts of reasons, including the following:
What People Do With Their Retirement Money
Based on all the reasons listed above, plus many more, lots of folks start thinking, "Should I move my 401k money into an IRA?" It's a logical question. However, it's important to remember that such a move entails both pros and cons.
Financial literature is filled with the positive side of the equation but rarely mentions the disadvantages of doing a rollover from a 401k to an IRA. That's why enlightening to explore the negatives in order to decide whether to make the move from one account to another.
Protect Your Wealth & Get Huge Tax Saving!
The Downside of Rolling a 401k into an IRA
If you have a choice of how to deal with your employer-sponsored 401k, consider the following drawbacks of moving all or a portion of the money into an IRA:
What are the details of those disadvantages? Here they are, point by point:
The IRS has limits on 401k and IRA contributions for individual taxpayers, with 401k limits being much higher. How much can a worker contribute to a normal 401?
For 2023, employee limits are $22,500 per year or $30,000 per year for people age 50 and older. That's quite a bit more than the limit for IRA contributions, which is $6,500 for workers under age 50 and $7,500 for anyone age 50 or older.
Many employers make matching or partial matching contributions to 401k's, and there's an IRS limit on those as well. The grand total that both you and your employer can contribute to a 401 in any single year is $66,000 for under-age-50 workers and $73,500 for those 50 and older.
IRAs don't have any employer-matching options, so you must be content with adding your own money to the account and not getting anything from an employer
Transferring from one type of retirement account to another entails some essential legal paperwork. First, it's necessary to set up an IRA that can receive the 401k funds. Then, an account holder must contact their employer's plan administrator and initiate the transfer by signing several documents.
Finally, they need to wait up to two months before the money is deposited into the new IRA. However, it rarely takes the full two months but happens within about 5 or 10 business days.
What About the Advantages of Switching to an IRA?
In light of the disadvantages of rolling a 401k into an IRA, why do millions of people do it every year? The reason probably is related to the fact that the pros far outweigh the cons. Actually, taxpayers fully realize that a typical IRA has lower contribution limits, does not get the benefit of matching provisions, and involves at least a modest amount of paperwork and red tape.
Even so, the trend seems to be in favor of moving out of 401k's and into IRAs. There are dozens of reasons for doing so. The most common ones include these:
Weighing the Pros & Cons
Obviously, the weight of the evidence is on the side of doing a rollover from a 401k into an IRA, particularly a gold IRA, also known as a self-directed IRA or SDIRA. Note that a so-called "gold IRA" can hold any precious metals, not just gold. However, gold is the top choice for most retirement investors.
In general, IRAs offer the flexibility of asset choices. And while they come with lower contribution limits and no matching provisions, working people of all ages seem to enjoy the chance to select from potentially high-growth assets, including stocks, bonds, commodities, and index funds.
In particular, savers who select gold IRAs gain access to a unique benefit: the ability to add a tangible asset in the form of precious metals to their retirement accounts. No other form of investment, even 401k's or traditional IRAs, can claim that advantage.
So, while the preponderance of the evidence weighs heavily in favor of transferring 401k savings into an IRA, the second fact to remember is that gold IRAs make the most sense for the majority of account holders.
What's the bottom-line verdict on the question, "What should 401k account holders do with their retirement funds?" Part one of the answer is: Moving to an IRA is usually the smartest option. Part two is: Moving to a gold IRA is the optimal solution in nearly every situation. As an asset class, gold carries unique and powerful benefits that are unmatched by any other type of investment, especially for retirement accounts.