Should I rollover my 401(k) when I retire?

Lyman H. Jackson, CFP® works with individuals and families who are retiring but also works with small business owners to design and manage 401(k) plans for employees. As such, he has a unique perspective when it comes to keeping money in a 401(k) or rolling it over into an IRA.

Retirement is a big deal. It is one of the biggest life transitions. After a lifetime of working and saving for retirement, suddenly everything is going to change. No longer are you going to be putting money into a retirement plan—you’re going to be pulling money out. That change alone can be a major psychological challenge for some people.

A central decision to retiring is deciding what to do with your employer provided retirement plan. For most people that is a 401(k) plan but other plans such as 403(b) and other tax-sheltered plans are similar.

While rolling over your old 401(k) into an IRA is common, it is not always the best option. I’ll talk about some of the pros and cons of each here.

When should I rollover my 401(k)?

Simplification

One of my top reasons for rolling over a 401(k) is to consolidate your retirement assets in one place. Since most people have worked for several different employers over their career, they often have multiple retirement plans with different firms. This can make tracking performance and investments more challenging than if the assets are all in one IRA. While this may not sound like a big deal, too often I have had people tell me “I have retirement plans all over the place and have no idea how they are doing.” Given how important retirement is “having no idea” does not sound like a good long term strategy for success.

More choice

IRAs typically offer a wider range of investment choices than 401(k) plans, including stocks, bonds, mutual funds, ETFs and other investments. 401(k)s tend to offer a limited investment selection. This is deliberate as it is well documented that 401(k) plans with greater than 20-25 options tend to have lower participation from employees. Our guess is that there are so many choices that it is too overwhelming and the employee just gives up. However, if you are working with a financial professional, they can help you evaluate tens of thousands of investment choices that can be specifically tailored to your needs and risk profile.

More control

Once you are a terminated employee, you’ll likely be less involved in your plan. Impromptu opportunities to talk about the plan with peers will go away and it is likely you won’t be participating in periodic employee education meetings where plan changes may be announced.

In addition, your plan can change features, benefits, investments and fees after you terminate. Increasingly this can mean paying higher fees as a terminated participant. Because your former employer bares the cost and responsibilities of managing the plan and your account, employers are looking for ways to strongly encourage former employees to transfer or cash out of their retirement plans. With an IRA, typically you have more control over your assets.

Access to professional advice

Today, more 401(k) plans are making available or adding some form of investment advice services to their plans. The need is great and that has spawned many online tools and advice services that enable participants to perform basic investment planning. While that may be sufficient for early or mid-career participants, those who are retiring now may want a customized solution to their retirement planning that takes into account their entire financial picture including their spouses’ finances. This is especially important for upper-income individuals and families as their financial situation is typically more complex and involves more assets invested in a range of different accounts. In that situation rolling your 401(k) to an IRA with help from a Certified Financial Planner™ may better serve your needs.

When should I stay in the plan?

In contrast to common knowledge, there are many advantages to staying in a 401(k) plan. Here are the top reasons:

Investments

Employer provided 401(k) plans typically have professionally selected and monitored investments. In addition, the plan’s administrator and / or financial advisor have a fiduciary duty to select investments that are in the best interests of plan participants. This usually (but not always) means that the 401(k) has a menu of attractive and low cost investment options. Because employer plans tend to represent large pools of money, they can often gain access to low cost, institutional versions of popular investments that are not available to individual investors. Even though the expense ratio differences can seem small, e.g., 0.10-0.25%, higher expenses can have a significant impact on your investment performance over time.¹

Ability to defer RMDs

Currently, workers age 73 or older must start taking Required Minimum Distributions from their pre-tax retirement plan (e.g., 401(k)s, IRAs, etc.). However, if you are still working and not a 5% owner of the company, you do not need to take an RMD from your 401(k).²  This can be especially helpful for older workers who are trying to catch up or build up their retirement nest egg.

Earlier penalty-free access

Most 401(k) plans allow participants to access their assets starting at age 55 without the early withdrawal penalty tax. This can be especially helpful to a participant that has saved adequately and wants to retire early. IRA owners must wait until age 59½ before being able to make penalty-free withdrawals. Keep in mind that all Traditional, pre-tax 401(k)s and IRAs are subject to ordinary income tax on 100% of withdrawals.

There are several other pros and cons to rolling over or keeping your assets in a 401(k). The rules can be complex so it is important to consider your particular circumstances and research the retirement plan rules before making your decision. Of course, I have a lot of experience in this area and would be happy to help you determine the best path forward based on your needs and situation.

If you have any questions about whether it makes sense to keep or roll over your 401(k), give me a call. I’m here to help. You can schedule a quick call with me by clicking HERE.

Lyman H. Jackson

Lyman@PlanWithFPS.com

617-653-3303

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¹ For example, if your investment returns 10% and the expense ratio is 0.75%, you actually receive a return of 9.25%. So, the higher the expense ratio of the investment, the lower your investment return. That is one reason why low-cost index investments have been very popular.

² If you have assets outside of your current employer 401(k) such as in an IRA, those assets are subject to RMDs.

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