MUTUAL FUND ARTICLES BY ULLI G. NIEMANN
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Rolling your 401k: Contributory IRA vs. Rollover IRA
By Ulli G. Niemann
In an ideal world you would start your working career with
a great company in your early 20s, steadily climb the corporate
ladder, retire at age 65, and draw a sufficient income from
your accumulated 401k account to live happily ever after.
Unfortunately, that's not how the real world works. If you
are like most people, you will change careers, or at least
companies, several times. Each time, you'll be faced with
the question of what to do with your accumulated 401k benefits.
You will likely have a few choices: keep your 401k with
your old employer (sometimes possible), roll the proceeds
into your new employer's 401k plan, or put them directly
into a self-directed IRA at a brokerage firm of your choice.
Since leaving your 401k with your ex-employer has no benefits
whatsoever and most employers will prefer you transfer out
anyway, that leaves only the last two as viable options:
1. Roll your 401k proceeds into the new employer's 401k
plan of (if allowed)
This is the most painless solution and the one that does
not require much decision making. While this is certainly
acceptable, there is a bigger picture.
The ultimate goal of having a 401k plan is to provide you
with a comfortable retirement. To accomplish this you really
need a wide variety of investment choices and the opportunity
to move among them in response to market variations.
Most 401ks are limited to maybe 15 mutual fund choices which
rarely change, even if market behavior dictates they should.
Additionally, the canned advice provided through plan sponsors
is generally not terribly useful.
The only benefit to this type of rollover is that if your
plan has a loan provision, you'll be able to borrow funds
2. Roll your 401k proceeds into a self directed IRA
This is the preferable solution for most people, and with
it you again have two choices: roll your 401k into a "Contributory" or
a "Rollover" IRA.
- Contributory IRA
Once you roll your proceeds into this type of IRA, you may
still contribute annually if you qualify (check with your
accountant). However, the 401k portion can no longer be rolled
back into another 401k with a new employer, should you ever
want to do that. So you eliminate the possibility of using
the loan provision with those funds. While it is possible
to borrow against an IRA, it's more limited than borrowing
against an employer 401k. Check with your tax preparer for
- Rollover IRA
This type of IRA allows you the most flexibility. You may
roll the proceeds back into a 401k plan if you want to utilize
a loan provision. However, for tax reasons you should not
make annual contributions to this IRA. If making annual contributions
becomes important to you, simply open another contributory
Since Rollover IRAs are usually set up at a brokerage firm,
you'll have access to their entire universe of mutual funds.
With this type of IRA, you can also employ an independent
investment advisor to manage the account for you. (Yes there
is a cost for that, but an effective advisor will more than
make up for that in greater returns than you would get without
him or her.)
Most of my clients have found that the investment results
we've obtained with their personal IRAs were far superior
to those yielded by their employer 401k plans or their personal
investing efforts. This has been mainly due to a combination
of better choices and a methodical approach to investing
which has kept my clients in the market during good times
and out of it altogether during severe declines.
Bottom line: Rollover IRAs offer opportunities to maximize
benefits and provide flexibility not usually available with
employer 401k plans.