Do You Want to Be Hit by an Apple ... or a Harpsichord?

Everybody knows the importance of being in the right place at the right time.  Consider Sir Isaac Newton.  He chose to sit under a tree that just happened to have apples on it—apples that at that very moment were preparing to demonstrate one of the fundamental interactions of nature that govern our universe.

Right time, right place.

On the other hand, consider his colleague, William Forget.1  He, too, was considering the possibility of gravity on that fine morning in 1666, but as he happened to be walking under a scaffold lifting a harpsichord, he never had the chance to tell the world about his theories. 

Right time, wrong place.

Fast forward a few centuries.  The idea of being in the “right place at the right time” applies to more than just physicists.  It applies to your money, too.  But many people only focus on the “right time” part.  They’re preoccupied with questions like, “When should I retire,” or “When should I get back in/get out” of the market.  Is it the right time to buy this, or the right time to buy that?  Yet just as important as the right time is considering whether your money’s in the right place.

If you’re like a lot of people, then you probably contribute to your company’s 401(k) plan.  If so, good for you.  It’s so important to have a qualified retirement account, and 401(k) plans can be a great fit.  But are they a great fit for you?  Is a 401(k) the best place for your money to be?  The answer is maybe—but maybe not. 

So what’s the alternative?  For some people, an IRA is the best place to be.  The main reason is that with an IRA, you will usually get a much broader selection of investments to choose from.2 

Here’s the thing about 401(k) plans.  Because they are run by employers, rather than employees, participants don’t often have much of a say in how they’re run.  Some 401(k) plans will lock every participant into the exact same style of investing, regardless of the participant’s situation or personality.  This usually means an extremely narrow range of investments to choose from, and indeed some plans don’t allow participants to make any choices at all.  Some plans might give you a little more freedom to choose a style and risk level, but the choices are still limited.  And while these choices might be good for some people, are they good for you?  What if your plan invests in mutual funds containing companies you’re not comfortable with?  What if you find the plan too risky, or too conservative?  The point of a 401(k) is to allow you to fund your own retirement—and remember it’s your income. 

If you have a good 401(k) plan, that’s terrific.  Or if you’re comfortable with someone else controlling your retirement funds, fine.  But if you’re not, then your money might be in the wrong part of town. 

There are two main advantages to converting to an IRA.  The first is that there are usually much better investment options to choose from.  With an IRA, you can choose investments that are right for you—not your company.  Remember, the idea is to grow your money.  An IRA can help you ensure that’s what actually happens. 

The second advantage is lower fees.  A recent AARP survey found that 71 percent of 401(k) participants think they don’t pay any fees at all3, but a 2009 study reported that the average plan charged a fee of 0.72%.4  That might not sound like much, but multiply it over the course of your employment.  Lowering that fee, or improving your investment return, can have a major effect on making your money last through retirement. 

Best of all, you don’t need to worry about negative tax implications.  Both 401(k) plans and IRAs are pre-tax accounts, so moving from one to the other has no effect on your taxable income.6 

I’m not saying that an IRA is for everybody, but you owe it to yourself to find out if it’s right for you.  Choosing the right time is important to success, but you also have to choose the right place.  With greater control, more investment options, and the potential for lower fees, an IRA can help ensure a healthy retirement.  To learn more, please give me a call at 781-505-1941.  Let’s find out if an IRA is the right place for you.