Here are six options that would-be rollover Jedis may want to keep in mind for their individual situations.
1. Roll over into a new individual retirement account. Transferring funds from a previous 401(k) into a new IRA preserves the most investing flexibility, advisors say. Company plans may limit options to a handful of mutual funds. An IRA lets an investor choose nearly anything, from bank certificates of deposit to real estate.
On the downside, a 401(k) tends to have lower costs than an IRA. “You probably have an advisor to the plan who’s basing the fees on a plan that has millions or tens of millions of dollars,” said Joseph Heider, a Chartered Financial Consultant and president of Cirrus Wealth Management. “So the investment costs and fees are generally lower.”
A major advantage a 401(k) has is that, as long as the account holder is still employed, he or she can borrow from it. Being able to tap retirement funds without paying the penalties and taxes levied on preretirement withdrawals is a potent benefit when deciding whether to roll funds out of a 401(k) and into an IRA, according to U.S. Financial Services’ Gobo. “The biggest reason for leaving it there would be the ability to borrow from the plan,” he said.
2. Leave funds in a former employer’s plan. Sometimes it is best to leave retirement funds in a former employer’s plan rather than transfer them to a new employer’s plan. For example, the old plan may have lower investment costs or better investment choices than the new employer plan.
“You want to look at the plan summaries to see which has the lower fees,” said Daryl Dagit, a CFP and financial advisor with Savant Capital Management. A plan summary will also describe the investment choices available.
More from Investor Toolkit:
Tax changes may breathe life into defined benefit plans
Need cash? Sell your life insurance policy for a lump sum
Former NBA player, advisor shares athletes’ financial fouls
Staying in a former employer’s plan is not always an option. If an account has less than $1,000, custodians can force an account holder to leave. “They can write the check and send it to you,” Dagit said. “Then you owe not only the tax but a penalty if you’re under age 59½.”
3. Transfer to a new company plan. Transferring 401(k) funds to a new company-sponsored retirement plan can be smarter than leaving them where they are if the new plan has more investment choices or lower fees. And it may be smarter than transferring to a new IRA, because of advantages a 401(k) has over an IRA.
The ability to borrow against account funds is just one advantage 401(k) plans hold. Savers who have reached age 55 and stopped working can withdraw 401(k) funds without having to pay the 10 percent penalty otherwise levied on early IRA withdrawals.
“It may be best for you to stay in a 401(k) even if your investment options are limited or costly if you want to retire before age 59½,” said Jonathon Jordan, CFP and vice president with Walkner Condon Financial Advisors. “That’s the age you can take withdrawals from an IRA.
“But with a 401(k), it’s 55.”
4. Do an in-plan Roth conversion. Sometimes the right approach is to do an in-plan 401(k) Roth conversion. Some plans allow for transferring all or a portion of a 401(k) plan’s funds into a Roth account within the same plan. This can save on taxes long-term, as future Roth 401(k) distributions won’t be subject to taxes.
“If you feel you’re in a lower tax bracket than you will be in retirement, then the Roth conversion makes sense,” Savant’s Dagit said. “If you’ll be in a lower tax bracket in retirement, it may make sense to do the Roth conversion once you retire.”
Be the first to comment