Q: Should I move my 401(k) to a traditional IRA?

A: My answer is an absolute and resounding “maybe”. Okay, I’ll even give you a “probably”, but it really depends on your circumstances.

Let me explain. First of all, most 401(k) plans will not allow you to move money out until you are no longer employed with the company providing it. Then you may withdraw it and spend what’s left after paying taxes, including possibly a 10% tax penalty. Or, you may move the money to a new employer’s 401(k). Or, you may move the money to a traditional IRA. These are the basic choices.

Why you shouldn’t take the money out and spend it is a huge and important issue in itself. But for now let me say…just don’t. The taxes and possible penalties are bad enough. Probably more important, though, is the fact that, trust me, you’ll need it later more than you need it now. You only want it now. There’s a difference.

Moving the money to a new employer’s plan doesn’t cause income taxes if it’s done properly, so that’s good. But it does limit your investment choices to those available in the new plan. They may be more and better than your original plan or fewer and worse, but they will definitely be limited as compared to all the possibilities available in traditional IRA’s.

Virtually any mutual fund, savings account, certificate of deposit, indexed annuity, stock and/or bond portfolio, or any combination of these and other alternatives, can be used for investing IRA funds. Many of these options don’t exist within the typical 401(k) plan.

The number of investment choices out there for an IRA are truly countless; and keep in mind also that professional advice is available for IRA holders as to which, when and how to pick these investments—and then manage them. How much advice do you get from a 401(k) plan? Usually, close to zero.

If the stock and bond markets are as volatile as I and many other experts expect them to be over the next decade, you’re gonna need advice. And if you’re nearing retirement, this is especially true. The nearer you are, the less time you have to recover from big mistakes.

Still another advantage to IRA’s over 401(k)’s only manifests upon death. Most company plans require quick distribution (within five years) upon death of a participant, thus soon causing a great deal of income tax. This is a financial disaster for heirs. On the other hand, an IRA upon death of the owner, depending upon who is named beneficiary, may be extended for the remaining lives of your spouse or children or both. A huge tax bill for your loved ones versus decades of tax advantage and consequent greater investment growth and income—seems to me the choice is easy.

But hold on. One definite advantage a 401(k) has over the IRA is for retired people age 55 through 59_. Funds from 401(k)’s can be taken without tax penalty in this age range and generally (with some exceptions) cannot be taken from IRA’s without penalty until after. As I said in the beginning, the proper choice depends on individual circumstances.

. . . take the money out and spend it - just don’t . . . you’ll need it later more than you need it now. You only want it now. There’s a difference.

For a free booklet on how to decide what to do with your 401(k) upon job change or retirement, please provide your name and address by writing to Ernie McDaniel, 2001 East 70th, Suite 407, Shreveport, LA 71106.

Ernie McDaniel is a Chartered Financial Consultant and President of McDaniel Financial. He can be reached at 318-798-9022 or via email.