Pros and Cons of a 401k Rollover

Today it is rare that a person will work for the same employer their whole career.  And, the number of people reaching retirement age is growing each year.  This means that, at some time or another, many will need to decide whether to remain in a 401(k) plan, transfer assets to a current employer’s plan, rollover the account to an IRA or take a distribution from the plan.  What are some of the pros and cons?

First, let’s talk about leaving your money with a former employer.  Remaining in the plan provides ongoing tax deferral.  If part of your plan includes company stock you should consider staying in the plan to keep the stock.  If you have a loan in the plan, rolling over may trigger income that you may want avoid.  Distributions from a 401k after age 55 may not be subject to a 10% penalty, whereas the 10% penalty on IRA distributions may be subject to tax until age 591/2.  If you plan to work after age 70, you can avoid required minimum distributions that you would have to take from an IRA.

Other considerations are the investments available in the 401k plan and whether they have reasonable fees.  If you have a diversified fund selection that offer lower fees, you might want to stay in the plan.  Plans typically do not have an unlimited number of investment choices.  There may be some investments you would like that are not in the plan.  In that case a rollover to an IRA might make sense.

Sometimes people lose track of an old account and don’t pay as much attention to the account as they should.  Some plans are only as good as the company that sponsors it. Changes that should occur like replacing investment choices and monitoring the plan’s costs don’t happen as often as they should.  If a company decides to change a plan to another investment firm, you don’t have any say in that decision.  Regarding fees, the plan charges administrative fees and usually pays a representative or advisor for providing services to the plan that you would not be paying in an IRA.

What about rolling to an IRA?  If you want to manage the account yourself, a rollover gives you access to a wider variety of investment choices.  If you use an advisor, you will also have more investment choices, but you have to be willing to pay the Advisor.  That person will earn some form of compensation whether it is a commission or a fee.  Some advisors will work on an hourly basis.  However you choose to work with an advisor, you should know what the cost is.  Many advisors offer a menu of services that are included in the fees you are paying to manage your account. Find out what services are available over and above investment management.  Some advisors use third party professional money managers.  Third party managers feature ongoing review of asset allocation, security selection and strategy.  This, of course, is not free.  You should know the costs.

IRAs do not allow loans and penalty free distributions are limited. Protection for creditors is more limited in IRAs than 401ks.  If you have money in more than one 401k, you might consider consolidating the accounts into one IRA.  This may reduce overall costs and simplify things for you.

If you have the option of transferring your account to your existing employer’s plan, look at the plans summary plan description for its features and benefits.  You should also review the plan’s investment notice that shows the fund choices and fund expenses. Taking a distribution from a 401k is subject to income tax and may be subject to penalties.  Proceed with caution.

Finally, the decision is not a simple one.  If you would like talk about your situation in detail, please give me a call.

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