An individual in IPERS covered employment upon retiring or at a different stage in life has a couple of options on what to do with their money.
The table above is based on an initial investment of $10,000, over a 50 year time period, with a 10% return. Your expense is the fee that your investments cost you to own. These fees are typically represented as a percentage. Opportunity cost is the total earnings that you would have made if all the money that you paid in fees, had been invested. Your final balance is the amount of money that you keep. Your net return, after all fees have been subtracted. Do you know what your investments are costing you? My investments cost be 0.07 per year.
Option 1: Transfer to an IRA
You can transfer it to an IRA (Individual Retirement Account) at a place like Vanguard or Fidelity are two examples. Why would you want to do this? Well you would have more low-cost options available transferring it to an IRA than leaving it inside your 403b/457. Do costs really matter that much? See visual above. The visual is off of my website. A calculator to show impact of fees. Another visual and explanation of costs.
The cost factor is something that we as individuals do have control over. The investment options that you have available within your 403b/457 in fees range from 0.04 – 1.27. With most of them being more on the expensive side. We know that the compounding of costs can add up in a hurry to. Research has proved this over and over.
Continuing on with option 1. If you were investing in the Roth option at your workplace and decided to leave it there you would be subject to the RMD (Required Minimum Distribution) at age 70.5. By transferring it to a Roth IRA the RMD would not apply. The RMD is essentially the government forcing you to take the money whether you want to or not. It starts at about 4% of the total value and increases slightly as you age.
Meanwhile, the RMD is based on the mortality table and the government wants you to take as much if not all the money before you pass. Above all, failure to withdraw the RMD amount will result in a 50% penalty.
The Traditional option no matter held at workplace 403(b)/457 or in an IRA you are subject to the RMD rules. If you or your spouse have outside money in an IRA than this provides the opportunity to have it all in one location. Which keeps things simple. I believe we would all agree that our lives our complicated enough. Therefore, the opportunity to keep things simple while also getting the most bang for our buck is ideal.
Option 2: Keep it Inside your Workplace 403(b)/457
The downside of this is about the exact opposite of option 1. The investments options provided and the costs associated with them are your only option. If you have the money inside the Roth option you will be subject to the RMD rules explained above. Also, if you or your spouse has other money it will be in multiple places. Which you may be okay with, but personally I like one location to keep things simple. With a good provider like Vanguard, I can have virtually any investment that I would like at a very low-cost.
On a side note, I have no affiliation with Vanguard. Because business model John Bogle set up is in the favor of the average individual investor and for that reason I would recommend them.
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