# Financial Tip 5: Rollover 401(k) assets to IRAs.

Tip #5: An employee leaving a firm can substantially increase retirement wealth by moving401(k) funds to an IRA.   Be careful though!  Protections against creditors are stronger for 401(k) plans than for IRAs in many states.

Examples of potential gain from rolling over assets in a high-cost 401(K) to a low-cost IRA

Example One:  A worker leaving her firm at age 50 can keep \$500,000 in 401(k) funds in the firm-sponsored retirement plan that charges an annual fee of 1.3% or can move the funds to a low-cost IRA that charges an annual fee of 0.3%.   The return on assets prior to fees in both the 401(k) plan and the IRA is 6.0 percent per year.

What is the value of the account at age if assets remain in the high-cost 401(k) and if assets are rolled over into the low-cost IRA?

• Account value of high-fee 401(k) plan is \$995,796.
• Account value of low-cost IRA is \$1,148,404.
• Gain from rollover is \$152,609.

Example Two: A worker changing jobs at age 30 can keep \$20,000 in the firm 401(k) or move the funds to a low-cost IRA.  The annual fee for the 401(k) is 1.3 %, the annual fee for the IRA is 0.3%. The underlying returns prior to fees for both assets in the 401(k) and assets in the IRA is 8.0%.

What is the value of the account at age 60 if the person keeps assets in the high-cost 401(k) or moves funds to a low-cost IRA?

• Account value of high-cost 401(k) plan is \$139,947.
• Account value of low-cost IRA is \$185,140.
• Gain from rollover is \$45,194.

Note: The impact of financial fees on the future value of the account can be calculated with the FV function in Excel.  The arguments of the FV function are the rate of return after fees, holding period in years, and the initial balance in the 401(k) plan.