These days some of us find that our largest asset is our 401k –from which we must take annual required minimum distributions (RMDs).¹ No one likes the idea of watching their nest egg dwindle. One way to conserve that nest egg is to roll the 401k over into an IRA.² While there will still be required minimum distributions, they may be made from a bigger fund.
First, too many 401ks have limited investment opportunities. With more diversification, there may be better returns.
Second, by moving into an IRA, you can “eliminate the middle man.” You no longer need to pay 0.5 to 1.5% to a plan administrator to choose mutual funds. You can choose them. Or, if you are getting too fancy for your own research, you can pay someone you choose to pick them for you: a registered investment advisor (RIA) or a certified financial planner (CFP). Depending on how much you pay them over a 20-30 year retirement, you could save a lot.
Ignoring the RMDs and and capital gains taxes for a moment³, let’s pretend that you retire with a $100,000 401k.
If you leave it with a plan administrator (or transfer it to an RIA or CFP) who charges 1.5% per year,
- after 10 years there will be $226,000;
- after 20 years, there will be $511,000;
- and after 30 years, there will be $115,500.
But if you roll it over to an IRA and pay someone who charges 0.5% per year,
- after 10 years, it will be worth $247,000;
- after 20 years, $614,000
- and after 30, $1,522,000.
Will you really die in your late 90s with $1.5MM? No. You will have been taking RMDs, lowering the amount which can grow. But, as you can see, the difference may allow you to take more, whether needed for a family emergency or wanted for a special trip or to make your home senior friendly.
¹You can take RMDs beginning at 59½ and must begin taking them in April of the year after you turn 70½.
²Make sure this is a joint account with your spouse to preserve the 401k spousal inheritance rights
³Other fees which could erode your investments are mutual fund operating expenses, called “expense returns” or, if you buy individual stocks and bonds, transaction fees per trade. Some mutual funds charge sales charges, called “purchase fees” or a “front end load.” Some charge redemption fees, called “back end loads” which phase out over time. Some charge management fees for portfolio management (12b-1 fees). Even some no load funds can charge up to 0.25% per year.
To calculate how these affect your return, see:
- Finra Fund Analyzer
- Bankrate Mutual Funds Fees Calculator
- “A Look at 401(k) Plan Fees for Employees”
While you may be better off having your CFP or CPA so it, you can calculate your RMDs yourself using IRS Publication P590a.
Lastly, don’t forget that financial planning and investment management advice over 2% of your Adjusted Gross Income is tax deductible.
Elder law attorney, Terry Garrett, is a member of the National Academy of Elder Law Attorneys and is an Approved Guardianship Attorney. She assists people in elder law, estate and special needs planning, guardianship and settling estates. She graduated with honors from Cornell University. She was on the Dean’s List at Wharton Business School. She earned her J.D. at Columbia Law School, receiving the Parker Award and a Mellon Fellowship.