Considering a 401(k) Rollover?

It is usually considered the most financially beneficial strategy when discussing 401(k) advice in the current market for the majority of higher-income earners, but is rolling your traditional 401(k) into an IRA (Individual Retirement Account) right for you? In this article, we take a quick look at the difference between the two types of pensions and summarise key reasons to rollover your 401(k).

What is a 401(k) Plan?

A 401(k) plan is a pension where employees and employers match some or all of the financial contributions. You don’t have to pay any tax until you actually start using your pension, and then taxation depends upon the type of plan. Generally, this tax-advantaged strategy is popular among those with mid-to-high income via formal employment.

Typically, a 401(k) holder will be invested through a lifestyle strategy; this is where a retirement year is chosen, and everyone with the same year of retirement has the same investment strategy. Most of these strategies have higher risk in the early years and will move to low risk in the latter years. Whilst this is fine as a default strategy, everyone will have differing retirement plans, needs, assets and circumstances, so it may not be the most appropriate when considering your 401(k) investment.

What is an IRA?

Individual retirement accounts (IRAs) are another form of tax-advantaged pension saving. These are designed for employees who desire an active and personalised approach to their pension funds. 

An IRA usually offers more choices for investment, allowing your pension to be personalised to your own retirement plan, risk preference, life goals and financial requirements. It’s possible to hold GBP or EUR funds in an IRA, whereas a 401(k) has no currency personalisation as you have to hold USD. This is an especially valuable benefit of IRAs to retirees not based in the US, as it mitigates fluctuations in their pension caused by investing in foreign currency. 

Options with a 401(k)

Yes, it is if your rollover is going to be between two accounts that are similarly taxed. Because of this, 401(k) and IRA rollovers make the most sense a majority of the time. The other available options, such as keeping, combining, or cashing out your 401(k) fund, are less popular when considering 401(k) fund advice because they usually limit opportunities for investment. Cashing out fully is an unpopular option as it can incur significant taxes and sometimes penalties. Although there is an initial cost, a 401(k) rollover approach allows you to take control of your pension, reduce potential currency risk and increase the personalisation of your investments.

How do I Know if Transferring my 401(k) to an IRA is the Right Choice for me?

Choosing to roll over from a 401(k) to an IRA is often a wise choice, especially if you’re based outside of the US. Major firms can win client loyalty by offering a few 401(k) investment options, but in most cases, they don’t give you access to personal advisers who can help you make the right choice, or they’ll offer a limited amount of investment opportunities, which often comprise their own funds. 

SmartAsset reports that the average all-in fee for a 401(k) is 2.22%, which, for a non-personalised service, is not good value for money. These negative aspects are part and parcel of the 401(k) pension experience. This is why people often look for other options. When your money’s transferred into an IRA, there is a better choice of investments, often at a lower cost. Most people will likely see some benefit from choosing to roll over and implement their own personalised strategy.

Personalised Financial Advice and Planning

When seeking advice to secure your financial future, it’s smart to speak to a pensions/financial expert. Here at First Sentinel Wealth, we offer personalised advice which considers the most beneficial retirement strategies for your personal circumstances and financial goals. We’re experts in cross-border financial advice and can help you with any 401(k)/IRA questions you might have. To begin exploring the possibilities of your financial future, why not give us a call today – we’re more than happy to help.


Contact Us

If you’d like to discuss your specific needs and ambitions and find the right advice for you, complete the contact us form and we’ll be in touch shortly.


How useful was this post?

Click on a star to rate it!

Average rating: 0 / 5. Vote count: 0

We are sorry that this post was not useful for you!

Tell us how we can improve this post?

What the general election result can mean for your personal finances