Rolling your 401k: Contributory IRA vs. Rollover IRA

Home
>
Investing
>
Rolling your 401k: Contributory IRA vs. Rollover IRA

Rolling your 401k: Contributory IRA vs. Rollover IRA

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; ulli@successful-investment.com

In The News:

Invest in India? Patience will pay off
CNNMoney
By Ali Velshi @Money May 25, 2012: 5:09 AM ET The challenges and investing opportunities presented by India -- a country of 1.2 billion people -- are vast indeed. (MONEY Magazine) -- My great-grandfather left his little village in India more than a ...

and more »

First Coast News
Facebook: A lesson in IPO investing
First Coast News
AP Facebook investors who assumed getting in on an IPO was a get-rich-quick scheme, just got a hard slap across the cheek, instead. Amid the frenzy for shares of the No. 1 social-networking company, many investors forgot a key of investing in initial ...
Individual Investors Deserve To Be Burned By FacebookSeeking Alpha
Five Calls To Make Now That You Own Facebook SharesForbes
Facebook could face huge damage claims from IPOPasadena Star-News
PolicyMic -EE Times (blog) -BusinessWeek
all 5,116 news articles »

U.S. News & World Report (blog)
Investing in Alternatives
U.S. News & World Report (blog)
By Tim MicKey The adviser community has a better understanding of the potential advantages of adding alternative investments to client portfolios as a way of diversifying and, hopefully, further managing risk in client accounts.
11 Ways to Help Yourself Stay Sane in a Crazy MarketPatch.com
Saving needs to become a disciplined habitMontgomery Advertiser

all 3 news articles »

Stanford Investment Group, Inc. Hosted Presentation "Your True Legacy: It's ...
San Francisco Chronicle (press release)
Stanford Investment Group, Inc. hosted a presentation discussing the differences between men and women as it relates to money and investing. Mountain View, CA (PRWEB) May 24, 2012 As part of Stanford Investment Group, Inc.'s mission statement to engage ...

and more »

Advisor.ca
REPEAT: BMO InvestorLine Addresses Four Online Investing Myths
MarketWatch (press release)
However, as widespread and convenient as online investing has become, a few myths still persist. "Despite the increasing popularity of online investing, a few misconceptions about the platform remain," said Cesar Rainusso, Vice President, ...
Online investing popular, but myths persistAdvisor.ca

all 14 news articles »

ThinkProgress
Goldman Sachs Investing $40 Billion More in Clean Energy
CleanTechnica
Not even a couple weeks ago, Mridul wrote that Goldman Sachs–backed firm ReNew Power Limited was investing Rs 6000 crore (over $1.1 billion) to build 1 GW (1000 MW) of wind power projects across India. Apparently, Goldman Sachs has much bigger plans ...
Goldman Sachs To Invest $40 Billion In Clean Energy: 'The Underlying Thesis ...ThinkProgress
Goldman plans $40-billion in clean energy investments over next decadeNational Post

all 53 news articles »

The Thin Line of Stock Investing
PR Newswire (press release)
CHICAGO, May 25, 2012 /PRNewswire/ -- Zacks Investment Research presents their newest list of stocks featured in their weekly Research Wizard article, which describes how to profit from stock market opportunities. The ideas in this article focus on the ...

and more »

USA TODAY
What should investors do with a windfall?
USA TODAY
By John Waggoner Investing You're probably used to reading newspaper advice about what to do in terrible financial situations, like what to do when your wallet's on fire, or how to pay for bail from a Turkish prison. By John Waggoner But sometimes, ...

and more »

Analysis: Funds of hedge funds fight to stay relevant
Chicago Tribune
Massachusetts' $48 billion state pension fund for instance recently completed a $500 million direct investing program, moving to cut its reliance on funds of funds. Meanwhile, in Europe, pension funds for companies such as ABB, Nestle and Novartis are ...

and more »

Interested in JDS Uniphase? Wait until the 2H/2012 to Invest
msnbc.com
But it is having problems attracting interested investors right now because it is a victim of a poor macro economy. Its clients just are not interested in spending right now. So what should a long term investor do if he/she is interested in looking at ...

Google News