Rollovers Series - should I or should I not roll-over?

Scott Russell |

When you change jobs, everything you need to take with you can usually be packed neatly into a couple boxes for your move - everything except your employer-sponsored retirement plan. Of course, you will likely enroll in your new employer’s retirement plan, but the decision as to what to do with your existing 401k plan may not be all that clear. As with anyone who leaves an employer-sponsored retirement plan, you have four options to consider:

  • Keep the money with your former employer’s 401k
  • Execute a rollover into an Individual Retirement Account (IRA)
  • Roll your money into your new employer’s retirement plan if it’s allowed
  • Cash out your 401k plan by withdrawing all your money (not recommended)

Your best course of action depends on a number of factors that should be considered in light of your situation, your attitude about managing your retirement plans, and the specific plan options available to you.

Key Factors in Determining Whether to Rollover or not

Employer-sponsored plan fees should be compared with the costs associated with investing in an IRA. Large employers are usually able to negotiate low fees, but they may also charge multiple fees, such as administrative and investment management fees which can add up. IRAs established through a mutual fund will incur the sales charges associated with the funds offered. It’s possible to establish a self-directed IRA through an online broker with a minimal annual fee using low-load or no-load mutual funds or low cost exchange-traded funds.

The other consideration is investment options. If your current plan offers a wide range of investment options enabling you to achieve optimum diversification among several different asset classes, you might be better off where you are. If the plan’s investment options are limited to just a few types of stock and bond funds, you should consider seeking greater diversification in an IRA.

When you should keep your money where it is

If, after comparing plan fees and options – with your new employer’s plan as well as with IRAs – you’ve determined your current plan offers the best of both, you should keep your money where it is. You’ll still have access to your account for making investment decisions and withdrawing funds, however, you may not have borrowing privileges. The only consideration is whether you want to monitor two different employer-sponsored plans.

When you should roll your 401k to another employer-sponsored plan

Again, comparing cost and investment performance, if your new employer’s plan offers an improvement in both (including a broader range of investment choices), your best course may be to transfer to the new plan. Even if the new plan doesn’t completely measure up to your old plan, there is the advantage of consolidating your plans into one for easier monitoring and management of your investments.

When you should roll your 401k into an IRA

If transferring to your new employer’s plan is not a desirable option, or it’s not allowed, you can establish a Rollover IRA. Rollover IRAs can be established through a bank, a brokerage firm, a custodian and online trading accounts. You can shop and compare fees as well as investment options. The one advantage a Rollover IRA has over an employer-sponsored plan is the range of investment options available. You can usually achieve broader diversification from among a wider choice of asset classes.

A Rollover IRA is also preferable for people who have more than one 401k plan from former employers. It’s far easier and can be more effective to manage your retirement assets in one plan.

Important Note: When establishing a Rollover IRA, it’s important to maintain it as a separate account from any other IRA you might have established if you plan on making any future contributions.

Why You Don’t Want to Cash Out of Your 401k Plan

Unless there is some urgent need for the funds presently, there is no reason why you should cash out, or withdraw your money from, your 401k plan. If you take possession of your funds before age 59 ½ you’ll be hit with ordinary income taxes as well as a 10 percent penalty (certain exceptions may apply). Even if you plan on rolling the money over to another qualified plan, it’s recommended that you do so with a direct transfer if possible. Although you have 60 days to roll the funds into a new plan, it’s not worth the risk of missing the deadline or some administrative glitch.

*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2014 Advisor Websites.