Reasons to Consider transferring your 401k to a Rollover IRA

Written by Carson Hamill CIM®, CRPC®, Associate Financial Advisor & Assistant Branch Manager & Dean Moro BComm, CIM®, Financial Advisor & Associate Portfolio Manager  

You've left your employer, or you’ve retired, but here's the twist - you left your 401(k) behind. Think of it like breaking up with your partner and deciding to leave your belongings at their place, even though you are now separated. Does this sound a bit odd?

In this blog we share 9 reasons you may want to consider converting your 401(k) to a rollover IRA when you leave your employer.

1. Enhanced Investment Options
2. More Control Over the Investment Process
3. IRA Custodianship
4. Improved Communication
5. Decreased Fees and Costs
6. Roth IRA Conversion Opportunities
7. Streamline Required Minimum Distributions (RMDs)
8. Simplified Rules
9. Estate Planning Benefits

1. Enhanced Investment Options

IRAs often offer a diverse range of investment choices compared to 401(k) plans, which tend to provide only limited investment choices to plan members. An IRA will provide you with greater flexibility to tailor the portfolio according to your financial goals and risk tolerance. With an IRA, you have a broad range of investment options, including individual stocks, bonds, mutual funds, and other securities.

2. More Control Over The Investment Process

With a Rollover IRA , you have more control over your investment decisions, allowing you to react promptly to market changes and opportunities. An IRA can accommodate a more active approach and allow you to rebalance the portfolio on your own schedule. This flexibility can be valuable for estate planning if you have specific investment strategies in mind.

3. IRA Custodianship

For regulatory reasons, some IRA and 401(k) providers may not be able to administer plans for clients living outside of the United States. If you are becoming a non-resident, it is important to find a custodian that can maintain your retirement account.

Raymond James (USA) provides a unique platform for Canadian residents with U.S. retirement accounts.

4. Improved Communication

Leaving your 401(k) with an old employer might inadvertently put you in the back seat from an administrative standpoint, almost treating you like a second-class citizen. Stay in the financial loop with a Rollover IRA for smoother communication and easier access to plan details and updates.

5. Decreased Fees and Costs

Transferring your funds into an IRA can alleviate the burden of management and administrative fees, which may be gradually eroding your investment returns. The 401(k) plan's funds may come with higher-than-average costs. Additionally, there may be an annual fee charged by the financial institution managing the 401(k) plan.

While a Rollover IRA likely won't be fee-free, it grants you increased flexibility and control over your investment choices, locations, and associated costs. And if you have consolidated your assets with one cross-border advisor, you can benefit from economies of scale.

6. Roth IRA Conversion Opportunities

If you are a resident of the United States, and are not a Canadian tax resident, rolling over a 401(k) into a Traditional IRA may provide you with an opportunity for future Roth IRA conversions. While this strategy involves paying taxes on the converted amount, it could offer tax-free withdrawals in the future, potentially benefiting you and your heirs.

7. Streamlining Required Minimum Distributions (RMDs)

Consolidating multiple 401(k) accounts into a Rollover IRA can make it easier to track and manage Required Minimum Distributions (RMDs). Instead of calculating and withdrawing RMDs from multiple accounts, you would only have to do it from a single account.

In addition, the IRS allows you to aggregate the required distributions from multiple IRAs if you have more than one traditional IRA. However, this rule doesn't apply to employer-sponsored plans like 401(k)s. If you have multiple 401(k)s, you generally need to calculate and withdraw RMDs separately from each account. This is another reason you may want to consider consolidating your retirement accounts.

8. Simplified Rules

401(k) plans often come with intricate and plan specific rules determined by employers, while IRAs adhere to standardized regulations set by the IRS. Each 401(k) plan may have its own set of rules, and the plan document governs the specific details. It's essential for participants to understand the plan's provisions regarding RMDs.

9. Estate Planning Benefits

In the event of death, there is a possibility that your 401(k) may be distributed as a single lump sum to your beneficiary, potentially leading to complications related to income and inheritance taxes. Regulations differ based on the specific plan, but unlike IRAs, administrators of 401(k) plans often prefer cash disbursement, effectively removing the account from their records. Remember to consult with your plan administrator to hear your options.

When it comes to estate planning, it is best to have nothing left to chance. As always, it is important to consult a lawyer experienced in cross-border estate planning. And you’ll want to ensure you are working with a team that includes your cross-border accountant, and an advisor that is dual licensed with experience in cross-border investment management.

* Note that the above strategies are mostly applicable to U.S. residents. For Canadian tax residents, there are other matters to consider when deciding whether to roll over a 401(k) to a Traditional IRA. For example, income from a 401(k) is eligible for pension splitting, where up to 50 per cent of eligible pension income can be split with a spouse. Income from a traditional IRA is not eligible pension income for splitting purposes.

In Summary

Change is never easy. But in this case, it could put you on the path to a financially brighter future. Contact us today for a thorough discussion regarding the benefits of a tax-free conversion of your 401(k) to Rollover IRA. As always, we recommend you consult with your cross-border advisory team, including a cross-border financial advisor and an experienced U.S. tax professional, before making any important decisions.

To learn more about converting your 401(k) to a Rollover IRA please click here.

Next Steps

If you are planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email us at Snowbirds Wealth Management, as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have a team behind you.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the U.S., they provide tailored investment solutions to minimize the tax burden when moving assets across borders.

To schedule an introductory call, please click here.    

Statistics and factual data and other information are from sources RJLU believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJLU is to be under no liability whatsoever in respect thereof.

Raymond James (USA) Ltd. advisors may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Investors outside the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Raymond James (USA) Ltd. is a member of FINRA/SIPC.