Why a rollover to an IRA makes sense for new retirees

Even if you don't have plans to relocate when you retire, financial advisers say you should probably move your 401(k) account to a new home.

Alan Reff, a retired technology consultant from East Williston, agrees. "Switching to an IRA was the best financial decision I ever made," says Reff, 78, who now volunteers for the U.S. Coast Guard Auxiliary at Jones Beach.

To be sure, there's no need to rush this decision. You have many other big changes to grapple with when you leave your career behind. Besides, a hasty choice can be costly. For example, if you left a job at age 55 or older, you can tap the 401(k) without incurring a 10 percent early withdrawal penalty. In an IRA, that penalty applies until age 591/2 - so before transferring a 401(k) into an IRA, you should withdraw any cash you need to live on.

But even if you have a good 401(k) plan, an IRA offers compelling advantages:

1. SIMPLICITY Each 401(k) plan has its own rules-and you may have accounts in several plans. "It's a lot easier for a retiree to manage one IRA," says John Tweedy, a certified financial planner in Floral Park who advises clients on an hourly, as-needed basis. (Fees range from $500 for a two-hour consultation to $2,000 for a full cash- flow analysis.)

2. CONTROL A 401(k) may require you to take distributions on a predetermined schedule, limit the number of times you can change investments, or delay implementing those changes. Reff says he retired in December 1999 and by early 2000 was convinced the stock market bubble was about to burst. "The 401(k) administrator was so slow to act on my requests to change investments that after two or three attempts, I moved my 401(k) balance into an IRA," he says. "That's how I was able to switch out of equities before the dot com crash."

3. INVESTMENT CHOICE A 401(k) has a limited and sometimes mediocre investment menu. Since it's designed for workers rather than retirees, it typically emphasizes long-term growth rather than capital preservation. For example, few plans offer Treasury Inflation-Protected Securities, or TIPS, an investment that experts say belongs in every retiree's portfolio. TIPS are U.S. government bonds whose coupon and principal are guaranteed to rise with the Consumer Price Index. (If you put $1,000 into TIPS that pay a 4 percent rate of return, and inflation is 2 percent in the first six months, for example, at midyear your principal is $1,020, and your interest is paid on the new principal.)

In some 401(k) plans, a stable value fund is the only fixed-income investment. An IRA gives you much broader selection. Maureen Grippa, 57, of Mattituck, who retired as chief financial officer of a Long Island security firm this year, says she transferred money from a former employer's 401(k) to an IRA in 2002. The reason: an opportunity to invest in an eight-year annuity with a return pegged to the S&P 500 Index, and a guarantee to return her principal, regardless of the market's performance. "I'm not a big risk-taker, so I was very attracted to the notion of protecting this principal," says Grippa, who now competes in horse-drawn carriage events with her husband, Paul.

Sal Neri, 67, an electrical engineer who retired at the end of 2007, says he'll probably switch to an IRA, too. Like many people whose investments were hammered in the 2008/2009 stock market implosion, Neri wants a more conservative portfolio but isn't sure what to pick. "I come from a long-lived family. I'll need income for at least another 20 years," says the Nesconset resident. "And I want to leave something for my daughter." He's understandably leery of the stock market - but financial advisers all say an investor with a 20-year horizon needs some stocks. "It's a question of proportions," Tweedy says. "A young person might have 70 percent of his portfolio in stocks. For a 65-year-old, a 50/50 or a 40/60 mix of stocks and bonds is appropriate - and I'd put 25 percent of the bond allocation into Vanguard's Treasury Inflation Protected Securities fund."

4. LOWER EXPENSES 401(k) fees are often high; employers have little incentive to reduce them, since they're paid by workers. In an IRA, you might cut your cost by one percentage point a year. That may not sound like much - but if you have a $500,000 account, it would save you $52,311 in 10 years.

Lynn Brenner writes Act2's "Ask the Expert" column and answers personal finance questions online at lynnbren nersfamilyfinance.com.