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Best alternatives for an orphan 401k plan

orphan 401k self directed ira

Take advantage of a self-directed IRA for more investment options with your orphaned 401k

Job security isn’t what it used to be and few workers stay with one employer for their entire careers. When you leave your employer, what should you do with your orphaned 401k plan (or 403b plan if the employer is a non-profit or governmental entity)? You basically have four options:

  • Transfer the account into a managed IRA (Individual Retirement Account)
  • Transfer the account into a self-directed IRA
  • Roll the account into another employer-sponsored 401k, if one is available
  • Cash out the account

Cashing out your orphaned 401k accounts is not an option, even if you’d like to use the money. Cashing out a 401k will mean a 10% withdrawal penalty plus paying income taxes on the full amount. Setting the precedent that it’s acceptable to withdraw money from your retirement accounts is going to leave you penniless in retirement.

Rollover orphan 401k Accounts

Rolling your orphaned 401k accounts into those run by a current employer may not be the best decision either. Most employer-sponsored 401k plans offer extremely limited investment options in funds where the manager happens to be offering the biggest fee kickback to the plan administrator. It’s still a good idea to get the full company match on contributions but putting more money to overpriced funds with high commissions won’t help you reach your financial goals.

For most people, rolling their 401k plan into a self-directed IRA is the best alternative. According to Cerulli Associates, a Boston-based research firm, around three million American workers rolled approximately $289 billion from employer plans in 2012. The bulk of this money, or almost $204 billion, was rolled into IRA accounts controlled by financial advisors. Another $85 billion was rolled into self-directed IRA accounts. The company also estimates that by 2017, Americans will roll $451 billion into self-directed IRAs, making this an $8 trillion market place.

Advantages of an IRA vs orphan 401k plans

orphan 401k self directed ira There are quite a few benefits to an IRA. If you have several orphaned 401k accounts, you can consolidate all of them into one account for ease of management and tracking. Most 401k plans have limited investment options and can charge high management fees to its participants. By rolling orphaned 401k accounts into a self-directed IRA, you gain better control of your retirement investments and the associated expenses. It may also be wise to sever ties with former employers depending upon how you left your job and the financial stability of their retirement plan. With the pension system crumbling, corporate sponsored 401k plans may be an easy target for corporate malfeasance.

There are specific rules governing a 401k rollover which must be followed to avoid withdrawal penalties and taxes. The funds will go into either a Traditional IRA or a Roth IRA depending on when you want to incur the inevitable tax impact. Managed or self-directed IRA accounts also offer different benefits depending on your needs and financial goals.

A managed IRA can offer many more retirement investment options than an orphaned 401k. Alternatives may include stocks, bonds, ETFs, CDs and mutual funds, but this type of account will also be controlled by a financial advisor. This advisor will charge fees and/or commissions for his services.

A self-directed IRA allows for a greater variety of investments such as physical gold, real estate, foreign businesses, horse farms, etc. The options are limited only by the investor’s imagination, risk tolerance and IRS rules and tax laws. This form of IRA truly gives the investor freedom to use his money how he sees fit to best serve his needs. A self-directed IRA also allows for greater financial diversification – for example in physical metals like gold and silver which is very appealing to many US investors today.

Before deciding if a self-directed IRA is best for you, consider how you want your hard-earned money to work for you, the benefits and restrictions of each type of account, and of course the tax implications you may face. Of course you can always contact the orphaned 401k experts at 401krollover.com. Our experts can help you select the best IRA options for your unique needs.

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