The Disadvantages Of Rolling Over A 401K Into An IRA

The Disadvantages Of Rolling Over A 401K Into An IRA

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:

  • They lose their jobs and are forced to relocate the assets elsewhere
  • The company goes out of business and ends the 401k for all current employees
  • Account holders believe an IRA is a better option, based on their personal situations
  • The employee wants to diversify their retirement portfolio by allocating a portion of the 401k funds to a traditional or self-directed IRA
  • They want more investment choices than the limited menu offered within a typical 401k plan

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 Disadvantages Of Rolling Over A 401K Into An IRA

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:

  • Loss of higher contribution limits imposed by the IRS
  • Potential loss of employer-matching provisions
  • The need to set up a new account and do additional paperwork to do the transfer

The main 3 disadvantages

Point 1

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.

Point 2

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

Point 3

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.

The Disadvantages Of Rolling Over A 401K Into An IRA

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:

  • The chance for people to invest in hundreds of different assets that are not a part of the restrictive 401k menu. Account holders can put stocks, bonds, and many other intangible assets into their IRAs
  • You have control over what goes into the IRA. Employers decide, for the most part, what you can put into a 401k
  • IRAs move with you from employer to employer. There's no need to stay in a job or with a company just to have access to the account.
  • An IRA can't be canceled or discontinued by an employer, which is fully possible with 401k's. The only way for an IRA to close is for the account holder to close it themselves
  • The law allows for a special kind of IRA, called a self-directed IRA (or SDIRA), to hold certain tangible assets, including gold, silver, platinum, and palladium
  • You can set up an IRA with any reputable brokerage firm or a major bank. There's no need to go through an employer
  • Gold IRAs, also known as precious metals IRAs, can help investors protect their assets from deterioration due to inflation and stock market downturns
  • IRAs are simple to maintain and understand. There's no need to learn complex financial terminology or get assistance from an employer plan administrator to read the quarterly reports
  • Any person who has earned income can open an IRA. There's no need to work for a company that has its own 401k. Note that many employers do not offer 401k plans to their workers
  • Gold IRAs are the only retirement accounts that are backed by actual, tangible assets. It's worth noting that both 401k's and traditional IRAs only hold paper-backed assets. The unique benefit of a gold IRA is not available to anyone whose only retirement account is a 401k

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.

Our Top 3 Gold IRA Rollover Companies: