If you’ve got an old 401(k) at a former employer, it might be a good time to transfer that account to an IRA through a rollover. This would give you more control over your retirement savings and provide additional investment options. However, there are situations when keeping your old 401(k) makes more sense. To figure out whether you should make a rollover into an IRA, there are a few points to consider.
How does a rollover work?
When you make a rollover, you’re moving your savings from one retirement plan to another. If you have a 401(k), the easiest move is to transfer that money to a Traditional IRA because you won’t owe any taxes on the rollover. If you’d like to transfer your savings to a Roth IRA you can do that as well. However, you’d need to pay income tax on your entire 401(k) balance to roll over the funds into a Roth IRA.
There are two ways to transfer money into an IRA. First, you can have the investment companies directly transfer the funds between the two accounts so your 401(k) balance would just move straight into your IRA. Another option is for your 401(k) administrator to send you a check for your savings and then you would deposit that money into your IRA. If you go this route, you need to put that money into an IRA within 60 days. Otherwise, it will count as a withdrawal in which you’ll owe income tax, and possibly a 10% early withdrawal penalty on your savings.
Reasons to rollover
Convenience – Once you’ve left your old company, you can no longer contribute to their 401(k) plan. Opening an IRA lets you continue saving for your retirement. Rolling over your old 401(k) into your IRA keeps all your money in one place. Managing your 401(k) this way is convenient and helps you keep track of all your savings- versus having to manage multiple retirement accounts.
More investment options – When you invest through a 401(k), your investment options are limited to what your employer chose for the plan. This may not fit your ideal investment strategy. When you invest through an IRA, you have a wider range of options. This is especially true with a self-directed IRA which lets you invest in alternative assets, such as, precious metals, real estate, and business partnerships. You will not have these options available in your old 401(k).
Lower fees – The fees in your old 401(k) depend on your former employer. Some plans charge higher fees than what you could get by investing through an IRA. If this is the case, you’re losing money every year in extra fees that you could avoid with a rollover.
Investment advice – When you set up an IRA, the broker managing your new IRA can give you investment advice for your portfolio. Your old 401(k) won’t offer this support. Even if your former employer offered investment advice as a benefit, you won’t be able to use this service anymore after you’ve left. Setting up an IRA would get you access to professional advice again.
Reasons not to rollover
Lower fees in the 401(k) – Sometimes, 401(k)s charge lower fees than IRAs. This can happen if your employer was large enough to qualify for institutional rates that are lower than what you’d pay as an individual. If you’re happy with your portfolio in your 401(k) and your research shows that the fees are lower than in an IRA, you may be better off not making a rollover.
Early retirement – You can start making retirement withdrawals from your old 401(k) earlier than from an IRA. You can make retirement withdrawals from an old 401(k) when you turn 55 whereas you’d have to wait until you turn 59 ½ with an IRA. If you’d like to retire early, a rollover could prevent you from accessing your money.
Company stock in the 401(k) – If you own shares of your former employer’s stock in your old 401(k), a rollover may not be a good idea. There are special tax advantages that apply when you own your employer’s stock in their work-sponsored retirement plan that would be cancelled out if you make an IRA rollover. You should double check with a tax advisor to see what strategy would end up working out best in this special scenario.
No matter what situation you are in, make sure you have a plan for all your retirement savings. By reviewing your accounts, you can decide if your best move is to make a rollover or to keep the funds in your old 401(k).