Since 2007, the majority of Americans who are rolling over their 401k plans are choosing to put their money into an IRA offered through major banking institutions. However, some financial advisors are wondering if that is the best place to rollover 401k plans. This is because there are some indications that banks are not necessarily a safe place for your money.
Of course, rolling over your 401k to any IRA is better than not rolling it over at all and taking a lump sum withdrawal when you leave your company. If you choose to withdraw your funds instead of rolling them over, you will not only immediately pay income tax on the amount you withdraw, but you will also pay a 10 percent early-withdrawal penalty for taking your money out before you turn 59 ½ years old.
Before you simply call up your local bank and request a rollover, though, you should consider whether that is the best course of action. Here are some reasons why banks might not be the best place to put your 401k funds after you leave your company.
Why Banks Aren’t the Best Place to Rollover 401k Funds:
Reason 1 – Safety Issues:
If you are like most Americans, you probably think your money is completely safe in a bank. You know your money is insured because insurance is now required after the crash of 1929. Even if a bank goes under, your money is your money and you will get it back one way or another because of this insurance. Unfortunately, this is not actually true. Your money is only insured if it is saved, not invested. For example, if you rollover your 401k into a CD or money market deposit account, your money will be insured up to certain limits.
However, if you roll your 401k funds over to a bank account and then choose to invest it in ETF, a mutual fund, or by directly purchasing stocks and bonds, your money is not insured. In other words, traditional bank savings accounts are protected, but investments are not. This is a critical distinction because you are probably going to roll over your funds in order to invest them. You are not going to put them in the conservative traditional accounts that fall under the FDIC insurance policy. If you are going to invest your 401k savings, a bank is not the best place to rollover 401k funds.
Reason 2 – Loss of Earnings:
If you are nearing retirement age and are rolling over your 401k to a traditional bank account like a CD or money market account, you are not making your money work for you as hard as it can. In fact, it can be dangerous to your retirement years to put your money in these “safe” accounts. The reason why it can be dangerous is because of inflation. Over 20 years, inflation is likely going to average four percent. This will decrease the purchasing power of your money by approximately 50 percent.
Even if you are close to retirement age, you still need to invest your money in accounts that are not as conservative as the ones offered by traditional banks. Of course, you don’t have to invest it all in more aggressive funds, but you do need to make sure some of your money is still working as hard as it can for you. Don’t just be happy with what you have right now. Invest it again and make sure your retirement years are as well funded as they can be. However, be aware of fees when choosing the best place to rollover 401k funds because they can eat up any profit you might gain by choosing a plan provider other than a bank.
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