What You Need to Know About Your Cash at the Bank & Why You Should Roll Your 401k to an IRA

Navigating the finance world can be a challenge. Do you know how safe your cash is at the bank? Are you familiar with the benefits of rolling your 401k to an IRA? The Certified Financial Planners at Nelson Financial Planning are here to provide valuable insights on these topics.

The Federal Reserve’s Rate Increases

The Federal Reserve has been steadily increasing rates, with the ninth straight increase occurring over the past 12 months. These rate increases now have a cumulative total of nearly 5 percentage points. It takes six to nine months for these rate increases to have an economic impact, so it’s important to consider how they may affect your bank.

How Rate Increases Affect Bank Investments

Banks invest their depositors’ money in relatively conservative, highly liquid investments, such as US Treasuries. When the Federal Reserve raises interest rates, the prices of bonds, including Treasuries, fall. If banks need to sell these investments to generate cash for their depositors, they may suffer a loss on their investment portfolios. This can lead to potential issues for banks and their customers.

The Importance of Evaluating Your Bank

Banks are businesses, and they are not immune to poor leadership or bad decision-making. Bank failures are a part of the normal economic climate, just like recessions. In fact, over the past 20 years, more than 565 banks have failed in the United States. But what does this mean for you, and where should your concern be?

As a consumer, you should evaluate your bank just as you would with any other business. Ask yourself whether the bank is reputable, and consider how much money you plan to keep with them. The FDIC limit is $250,000 per person, per account ownership, which means that a typical joint account is covered up to $500,000.

“Everybody Gets a Trophy”

One concern that should be on your radar is the “everybody gets a trophy” mentality at the Federal Reserve. This mentality has led the Federal Reserve to step in and cover losses beyond the FDIC limit, even for banks that did not exercise due diligence. Treasury Secretary Janet Yellen has echoed this sentiment, stating in a March 2023 speech that intervention is necessary when warranted.

The problem with this approach is that it encourages bad behavior and excessive risk-taking by banks, knowing that the Federal Reserve will come to the rescue. This could lead to more bank failures and higher costs for consumers, even if these costs are not explicitly seen on tax returns.

Know What You Own and Ensure Full Accessibility

When it comes to wise investing, it’s important to know where you’re putting your money. This means understanding your portfolio in detail—not just that you own a mix of stocks, bonds, and cash, but what types of companies and sectors you own, as well as the credit quality and maturity of the bonds you hold.

In addition, it’s crucial for your investments to be fully accessible at any time. This includes having active management to make necessary adjustments as market conditions change. Passive index investments may not provide the level of flexibility you need to navigate the changing financial landscape we’re seeing today.

ESG Investing and Biden’s First Veto

President Joe Biden’s first veto as president came because of a bill that sought to overturn the Department of Labor’s rule imposing Environmental, Social, and Governance (ESG) requirements on investments in employer retirement plans. The veto means that the Department of Labor’s rule still stands, which mandates certain ESG considerations.

Rolling Your 401k to an IRA

There are plenty of reasons to consider rolling your 401k or 403b to an IRA, and the ESG rule controversy provides yet another reason to do so as soon as possible. The Department of Labor’s rules apply only to employer-sponsored plans, not individual retirement accounts (IRAs). By rolling over your 401k to an IRA, you may enjoy these benefits:

• Greater investment options: In an IRA, you have the freedom to select from a wider range of investment options compared to 401ks, and you’re not limited by the Department of Labor’s jurisdiction. This allows you to diversify your portfolio and focus on achieving the best possible returns without being constrained by rules that don’t align with your financial goals.
• More flexibility: Rolling over your employer-sponsored plan to an IRA also provides additional flexibility when accessing your funds. Many plans allow for in-service rollovers, meaning you can move your funds to an IRA while still employed with the company, as long as you meet certain age requirements.
• Easier management: Consolidating multiple 401k accounts from previous employers into a single IRA simplifies your financial management and makes it easier to track your investments.
• Potential for lower fees: Many 401k plans have higher fees than IRAs, so rolling over your 401k to an IRA could save you money in the long run.

Contact Nelson Financial Planning

When it comes to making informed financial decisions, understanding the safety of your cash at the bank and the benefits of rolling your 401k to an IRA is crucial. Partnering with a trusted financial planner can make all the difference. At Nelson Financial Planning, our Certified Financial Planners have the knowledge and experience to guide your investment decisions. We can help you change your life with a successful financial plan that provides peace of mind for the future.

Contact us online or call our Winter Park, FL, office at 407-629-6477 today to learn more about making the most of your retirement savings.