401K Transfer-Direct-Rollover
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May 9, 2023

The Great 401(k) Debate: To Rollover or Not After Job Change?

Have you left a company that offered 401(k) benefits?  Read this article for some key considerations after you leave a job.  And make sure to read to the end as there are reasons not to roll out your 401(k) into a self-directed IRA, such as early access to funds.

Reasons To Roll Over Your Money:

Rolling over your 401(k) into an IRA after leaving a job can have several benefits. Here are some reasons why you might want to consider this:

  • Greater Investment Options: One of the most significant advantages of IRAs over 401(k)s is that they often offer a broader range of investment options. While a 401(k) typically restricts you to a select list of funds, an IRA can give you access to individual stocks, bonds, mutual funds, ETFs, and even certain types of real estate. See The Balance’s article – Benefits of Rolling Your Old 401(k) into a Rollover IRA
  • Potentially Lower Fees: Some 401(k) plans charge high administrative and management fees. By rolling over to an IRA, especially one you manage yourself, you might be able to lower these costs.
  • Simplicity and Consolidation: If you have multiple old 401(k)s, it can sometimes be easier to keep track of your retirement savings if you consolidate them into one account. However, if you’re happy with your old plan’s features and investment options, you might choose to leave your money where it is. See The Street’s article – Why Rolling Over Your Old 401(k) is a Good Move For Your Retirement
  • Flexible Withdrawal Options: Once you reach retirement age, IRAs can offer more flexibility in terms of withdrawal options compared to 401(k)s, which may only allow lump-sum withdrawals or specific installment payments.
  • Easier Estate Planning: IRAs often offer more options and flexibility for designating beneficiaries and managing your account if you pass away.
  • Roth Conversion: If you have a traditional 401(k), rolling it over to a Roth IRA might make sense if you expect to be in a higher tax bracket in retirement or a tax conversion strategy you are implementing. You’ll pay taxes on the conversion now, but withdrawals in retirement will be tax-free.

 

Reasons Not to Roll Over Your Money:

While it’s often beneficial to roll over your money from a 401(k) into an Individual Retirement Account (IRA) after leaving a job, there are some circumstances where this may not be the best course of action. Here are a few reasons why:

  • Early Access to funds: If you think you might need to access your retirement funds before age 59½, you might want to leave your money in a 401(k). While both 401(k)s and IRAs impose a 10% early withdrawal penalty, many 401(k)s allow for penalty-free withdrawals if you leave (voluntarily or involuntarily) your job during or after the year you turn 55, while IRAs don’t offer this exception.
  • Protection from creditors: Federal law provides unlimited protection to 401(k) assets from creditors. While IRAs are also protected, the protection is limited to a certain amount per person in the case of bankruptcy.
  • Required Minimum Distributions (RMDs): If you continue to work past the age of 72 and don’t own more than 5% of the company you work for, you can delay taking required minimum distributions from your current employer’s 401(k) until you retire. This rule doesn’t apply to IRAs or 401(k)s from previous employers.
  • Loans: Some 401(k) plans allow you to borrow from your account, which isn’t typically an option with IRAs.
  • Investment Options: While it’s true that IRAs often offer more investment options, some 401(k)s offer access to institutional-class funds that might have lower fees than similar investment options in an IRA.
  • IRAs were converted to Roth during the year: In this case, it is advisable to consult with a qualified financial advisor, as you may incur additional taxes beyond what is expected.
  • Net Unrealized Appreciation (NUA): If you hold company stock in your 401(k), you might benefit from the NUA tax rule by not rolling over the assets into an IRA. This is a complex strategy and you should consult with a tax advisor if you’re in this situation.

Remember, everyone’s financial situation and retirement goals are unique, so what works for one person might not work for another. Be sure to consult with a financial advisor or retirement planning specialist before making any major decisions about your retirement savings.

Matt Ward, CFP®

Financial Planning