Someone who has changed jobs might be wondering what to do with the 401(k) savings left with a former employer. One option is to put the money in a rollover IRA. A rollover IRA can help someone keep savings on track while still saving on taxes.
A rollover IRA lets an individual move assets from a retirement plan to an individual retirement account without having to pay taxes. That money grows tax-deferred.
With an IRA, there are more investment options than keeping the money with a former employer. Usually employers do not like to give 401(k) participants many options because they worry about employees getting confused when there are too many choices. They also may have obligations as trustee to keep options diversified. Sometimes when there are too many choices, there may be more than one option in an investment strategy, making the types of funds available not considered diverse. With an IRA, a person can access stocks, bonds, exchange-traded funds, and mutual funds.
A person can sign up for an IRA account through a local bank, or through an investment company. At a bank, funds are FDIC insured. However, the return may not be high. Usually bank products are limited to CDs and money markets. If the IRA is with an investment company, the funds may not be FDIC insured, but the company may be a member of SIPC so there may be other insurance protection if the financial institution goes out of business.
With an IRA, retirement plans can be consolidated. A person is able to manage investments in one place. With a 401(k) plan, money may not be able to be moved out of the plan. Consolidating retirement plans helps a person diversify and rebalance funds easier.
A rollover IRA helps to avoid early withdrawal penalties and taxes. Funds are not taxable as long as they are in the IRA account.
Consult with an experienced Massachusetts tax attorney to learn more about individual tax planning.
