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  • Mark Fonville, CFP®

Is a Rollover IRA at Fidelity Right for You?

Is a Rollover IRA at Fidelity Right for You?

Maybe you've got an old 401(k) (or two) and have no idea what to do with it.

Instead of leaving it sitting in your old employer's account gathering dust, you may consider rolling it over to an IRA account at Fidelity.

When it comes to rollovers, perhaps the most crucial decision you have to make is where to invest your money.

Your investments are an integral component of your retirement plan, after all. You can do your rollover at almost any bank or brokerage firm, but the proper financial custodian can make or break your experience.

As a registered investment advisor, we have the flexibility to use the best custodians for our clients. We often use Fidelity and have been very happy with the platform and quality of service our clients receive.

Download Free: Should I Rollover My Old 401 (K)? [New for 2021]

With so many options, is a Rollover IRA at Fidelity right for you?

What's A Rollover IRA?

When you leave an employer, there are several ways to handle your 401(k).

You can cash it out, but that is rarely the best choice. That’s like hitting the reset button on your retirement because you will have to pay taxes and penalties on the amount you withdraw.

You could also let it sit in your former employer's plan, but there are lot of reasons your old 401(k) may not be the best option to grow your money long-term, including:

  • Limited investment options

  • Potentially higher costs, depending upon the 401(k) plan

  • After-tax 401(k) money may be better off in a Roth IRA

  • Lack of flexibility on making withdrawals in retirement (strict RMDs)

A rollover IRA may help address these concerns. A rollover IRA allows you to transfer money from a previous employer-sponsored plan like your 401(k) into an IRA. Because it isn’t a distribution, you won’t owe taxes or penalties (unless you roll pre-tax funds into a Roth IRA), and the money will continue to work for you.

You can roll your money into a traditional or Roth IRA. Since both a Traditional IRA and 401(k) are tax-deferred investments, you can typically roll the funds over tax-free. While you would pay taxes on a full or partial rollover to a Roth IRA, there could be many long-term tax benefits to consider. Be sure to discuss your options with your tax advisor.

The choice depends on your situation, goals, and contribution source. You can gain a better sense of which is best for you by downloading our free guides:

There are several good reasons to roll your 401(k) into an IRA, but a potential downside is that you lose some protection from creditors.

Money in accounts that are covered by the Employee Retirement Income Security Act (ERISA) typically cannot be seized by creditors if you are sued. This may not be a top concern, but it’s worth knowing that creditor protection rules are different for Rollover IRAs.

Another consequence is that in most cases, you have to be 59 1/2 to withdraw from your IRA. Unqualified distributions may lead to early withdrawal penalties, which could eat into your retirement savings.

IRA contribution limits are also far below 401(k) contribution limits—$6,000 and $19,500 respectively for 2021.

How Can A Rollover IRA Benefit Your Investment Plan

So what are the benefits of rolling over a 401(k) to an IRA at Fidelity?

First of all, you’ll likely have access to a broader array of investment options like mutual funds, low-cost exchange-traded funds (ETFs), real estate investment trusts, and more. Such flexibility means you can create an investment plan and allocation strategy that is completely customized to you and your goals without having to cut corners due to a limited set of choices.

There are administrative fees associated with operating a 401(k). These sometimes get passed to plan participants, so it’s possible that your investment fees will be lower in an IRA as well. Investment fees are a major contributing factor to your long-term investment performance, so that’s a big perk.

In exchange for assuming a small risk from creditor liability, rolling over an ERISA-protected 401(k) plan may provide you with greater diversification at a lower cost.

Then, there is the convenience and simplicity that come with investing in an IRA. You’ll likely change employers multiple times throughout your working life. Combining retirement accounts into a single IRA each time makes things easier to track and manage.

It also reduces paperwork because each account comes with statements, investment information, and regular updates. Consolidating old 401(k)s to IRAs also simplifies the withdrawal and required minimum distribution processes when the time comes.

Top Reasons To Consider a Fidelity IRA

There are several benefits to opening your rollover IRA at Fidelity.