Should You Roll Over Your 401k?
What happens to the money in your employer's 401(k) retirement plan when you leave your job or retire? If you have a retirement account from a former employer, it's probably best not to ignore it. It's your money, and you should decide what you want to do with it. You have a few options to consider to make sure you're doing what's right for your nest egg.
- You can leave it where it is (with the sponsored plan) if the balance is $5,000 or more.
- You can roll it over into an Individual Retirement Account (IRA) or into your new employer's plan if it accepts rollovers
- You can take the cash (but this option can have the biggest downside consequences, especially if you're far from retirement age)
What you need to consider
Fees and expenses charged by your retirement plan, the funds you're invested in, or the brokerage of your choice will likely differ. It's important to understand exactly what you're paying, and why. Every cent you pay in fees and expenses will count against your earnings, and that can really add up over a long period of time.
Here's something you probably didn't consider. Your 401k plan's assets are generally protected from creditors under federal law. That's not completely true for IRAs - they have protection in bankruptcy proceedings only, and state laws vary.
Depending on your age, there may be some other considerations. If you're between 55 and 59 1/2, you may be able to take penalty-free withdrawals from your 401k, but you'll have to wait until age 59 1/2 with an IRA for the same tax treatment. And if you're at least age 70 1/2 and still working, you might not be required to take minimum distributions from your current employer's plan (but it's required from an IRA).
We've covered a few examples here, but there could be other considerations depending on your specific situation. It's a good idea to talk to your tax advisor.
Leaving it where it is
It's tempting to leave your retirement plan right where it is. It may be doing just fine, as far as you can tell. This might be the easiest option for you.
If your account is worth less than $5,000 and you don't tell your former employer what you want to do with it, then your employer could select an IRA to roll your account into on your behalf.
Some plans actually charge higher fees on inactive accounts than on those you're contributing to. And, believe it or not, a surprising number of people simply forget about accounts they leave behind.
Things to consider
- Are you happy with the investment offerings from your plan?
- Can you easily access your account balances, investment choices, and information online?
- Does your plan offer services (such as investment advice) that you may not be able to get after rolling over?
- What fees and expenses are you being charged for?
Rolling your 401k into an IRA
You have the option to roll over your 401k into an IRA with the bank or brokerage of your choice. You may gain some extra account features with this move, or you might find that it's not quite at the level you experienced with your plan.
If you do decide to roll over directly from your plan to an IRA, you can maintain the tax-deferred status of your retirement assets. You may benefit from more investment options for your retirement savings, and the fees and expenses may be much lower, especially if you choose your bank or brokerage wisely (but check to be sure).
Consolidation may be a benefit to rolling over into an IRA, especially if you've held a few jobs with a few different retirement plans. It can be done, but it's harder to get a clear picture of exactly how your retirement money is invested if it's spread across many accounts. If you're not sure how each of your investments stacks up, it's hard to know how much risk you're exposed to.
Taking the cash
If you listen to common wisdom about 401ks, you'll probably hear that you should not take the cash if you're not at retirement age. There's a reason this is popular advice. It's tempting, and it can feel like a windfall, but most of the time it's not a good idea. There's little to be said in its favor even if you have a real plan for what to do with the money. And most people don't.
If you take a cash distribution from an old 401k and don't roll it over, you have to pay income tax on the entire amount for the year you took the withdrawal. If you aren't yet 59 1/2, there's an additional 10 percent tax penalty on the full amount.
Not only will you owe taxes (and maybe penalties, too), but you're also missing out on any potential earnings that cash may get you. There are dozens of online calculators that can show you how much a hypothetical investment can be worth over time. Run the numbers yourself, and you can easily see why it could be better to leave that money invested instead of cashing out, especially if you have a decade or more before you retire.
It's your money
Whether you have $500 or $50,000 in your 401k, remember that it's your money. You've worked for it, you've earned it, and you're entitled to it. Regardless of when you plan to retire, the sooner you take control of your retirement assets (whether you roll over or not), the better off you'll be.