Why You Might Not Want to Roll Over Your 401(k)
If you were one of the people who took advantage of a new opportunity, you might wonder what to do with the 401(k) you had with your former employer. Should you jump on a rollover? Should you try to put your old 401(k) into the new 401(k) with your new employer? You might not want to do either of these things and let’s find out why.
What is a 401(k) Rollover?
A 401(k) rollover involves transferring the money in your 401(k) plan to a new 401(k) plan or IRA. You can roll it over to another plan or IRA within 60 days from the date you receive a personal distribution.
Whatever You Do, Don’t Cash it Out!
Do not take the lump sum and spend it all. You’ll have to pay withdrawal penalties and you’ll miss out on the miracle of compounding.
You can avoid the temptation to go on a spending spree by having it sent directly to your new IRA plan administrator. If you have it sent to you and don’t get it rolled over before the 60-day deadline disappears, your distribution will count as a withdrawal and you’ll owe ordinary income tax and a 10% early withdrawal penalty if you’re not 55 or older.
Reasons You Might Want to Skip the Rollover
You may want to keep your 401(k) savings in your existing plan after you leave your job, and your employer might let you! If you opt to keep money in a former employer’s plan, you will not be able to make additional contributions to your balance. However, it will still experience tax-deferred compounding.
Reason 1: You may like your former employer’s investing options.
You may like the investment lineup in your former employer’s retirement plan, so why move it out? If you like your plan portfolio, you can keep the money there. On the other hand, if you think it charges too many fees or doesn’t offer a lot of investment options, you may want to move your money out.
Reason 2: Your former employer offers unique investments.
Your former employer may offer the opportunity to invest in unique investments. For example, let’s say you really like a particular combination of environmental, social and governance (ESG) investments. Or maybe you have access to items like stable-value funds that you can only get through a 401(k) from your employer.
Reason 3: You find that your former plan has lower fees.
Many employer-sponsored retirement plans give you access to low-cost index funds or cheaper institutional share fund classes. If you’ve done your research and realized you can’t find these same lower costs in an IRA, you may want to keep your money in your former employer’s plan.
Reason 4: You’re protected from lawsuits.
Employer-sponsored retirement plans get better creditor protection under federal law compared to IRAs. Federal law provides protection for individual retirement accounts to help prevent creditors from raiding your IRA. They are protected from creditor judgments, including bankruptcy. IRAs, including Roth IRAs, don’t have precisely the same protection. However, under a 2005 law, the Bankruptcy Abuse Prevention and Consumer Protection Act, you can shield up to $1 million in an IRA.
Reason 5: You own company stock in your old 401(k).
Rolling company stock from a 401(k) into an IRA might not be a wise choice. The tax code allows you to benefit from special tax treatment under “net unrealized appreciation” rules, which will save you a lot of money. You can no longer use the NUA rules if you roll your money to an IRA. In this case, check with a financial and/or tax advisor for more information.
Reason 6: You want your money earlier.
Usually, you have to wait until at least age 59 ½ to start accessing funds in an IRA. Not so if you quit, retire or get fired at age 55 or just thereafter. You can take the money out at that point if you want, rather than keeping your money tied up for another 4 ½ years.
My Fiscal Office LLC
77 Bleecker Street
New York, NY 10012