Pros and Cons of a 401K to IRA Rollover in Railroad Retirment

Greetings, everyone, and welcome to another installment of the Highball Advisors Railroad Retirement whiteboard session. I'm John McNamara representing Highball Advisors, and today I'm delving into a crucial topic: your retirement savings strategy. If you're preparing to exit your railroad career, you've likely accumulated a 401(k) – or if you've transitioned from another job, you might also possess a 401(k). So, what are your viable choices? Essentially, there are two main avenues: retaining it within your 401(k) or transferring it into an IRA. In this brief presentation, I'll outline the advantages and disadvantages, providing you with food for thought.

Let's begin with the positives of transitioning to an IRA. The first one is straightforward – expanded investment options. Your current 401(k) might offer around 20-25 investment selections, which is quite limited. Conversely, the realm of IRAs presents thousands of investment opportunities spanning a wide spectrum. Moreover, the potential for reduced fees exists, contingent on your chosen investments. While some 401(k)s feature cost-efficient index funds, the overarching trend leans towards lower fees in IRAs. A noteworthy aspect is consolidation; if you've amassed multiple 401(k)s from various employments, rolling them into a single IRA streamlines your financial landscape, eliminating confusion. And lastly, I emphasize the significance of Roth conversions. Shifting funds into a tax-free Roth account carries essential tax planning implications, especially in retirement. Transitioning to an IRA facilitates these conversions, which can significantly impact your tax burden.

Now, let's examine the flip side, the cons of opting for an IRA. One drawback is the forfeiture of 401(k) loan privileges. Although I don't particularly endorse loans from retirement funds, emergencies can necessitate this option. Another con pertains to limited creditor protection in IRAs. While this might not be a pressing concern, it's worth acknowledging. In contrast, 401(k)s are fortified by ERISA rules and regulations. Additionally, a valuable advantage of 401(k)s is the penalty-free access at age 55. This provision, often referred to as the "rule of 55," can be advantageous for those seeking to bridge the gap to their railroad retirement annuity, especially if they haven't reached 60 years of age with 30 years of service. This is not a luxury available in IRAs. Lastly, let's address fiduciary responsibilities. 401(k)s carry fiduciary obligations, ensuring a level of protection. When moving to an IRA, this protection might be contingent on the type of advisor you choose to work with. While fee-only fiduciary advisors exist, some may have affiliations with broker-dealer models, which might introduce different considerations.

In conclusion, ponder the pros and cons when deciding whether to roll over your 401(k) upon retiring from the railroad. It's yet another vital decision on your retirement checklist. If you've found this discussion helpful and require guidance with your 401(k) decisions as you approach or enter retirement, feel free to reach out. Please share this video and activate notifications for our latest updates. Until our next encounter, stay safe, stay focused, and take care. Farewell for now, everyone. Goodbye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved from Highball Advisors, and all rights are reserved.