Should You Rollover That Old 401(k)?

Do you have an old 401(k) sitting around from a previous job? If so, you have a few options to consider. You could cash out your account, but if you don’t put the cash back into an Individual Retirement Account (IRA) or other qualified account within 60 days, you’ll owe income taxes (and possibly penalties) on your withdrawal. If your current employer permits rollovers into its retirement plan, you may also be able to move your savings over to a new 401(k) and consolidate your investments.

A third option is to rollover the 401(k) assets into an IRA. By moving the assets directly to a new trustee, you won’t be subject to any withdrawal penalties. Depending on the investments you hold within the account, the rules imposed by your current plan and your overall financial strategies, you may be able to transfer some or all of your account directly to an IRA without liquidating the assets.

Why might a rollover be a good idea?

You May Have Access to A Greater Number Of Investment Options

401(k)s and other workplace retirement plans are often limited in the number and type of investment options they offer. IRAs can hold nearly any type of investment, giving you much more flexibility in your investment strategies.

An IRA Could Give You More Control

Now that you’re no longer an employee, you may not be able to make changes to your investments, robbing you of the ability to adjust your allocations to fit your current circumstances and long-term goals. You also may not be advised of important changes to 401(k) fees and investment options at the old company.

It Could Simplify Your Financial Life

One of the best arguments in favor of rolling over the assets is that investors tend to lose track of accounts that aren’t right in front of them. A single IRA makes it much simpler to review and make changes to your investments.

It Could Reduce Your Total Fees

There are several fees to consider. Depending upon your 401(K) plan, you could have multiple layers of fees so it is essential to evaluate them all. These could include administrative costs, custodian costs, internal costs associated with the actual investment choices and, possibly some type of commission or management fees. Remember, not all 401(k) plans are the same so it’s important to see if a rollover to your IRA will really save you fees and expenses.

However, rolling over an old 401(k) isn’t always your best option. Depending on your personal circumstances, it can sometimes be a better idea to leave your old workplace account exactly where it is.

Your 401(K) Might Offer Lower Fees

Though you don’t have the right to make additional contributions, you may still have the same investment options and fee structures of current employees. If you would be paying commissions or have expensive investment costs in an IRA, then the 401(k) could actually have lower overall costs than the IRA. As with 401(k)s, not all IRA’s are the same so it’s important to see if staying put in your existing 401(k) plan might actually save you fees and expenses.

You Own Company Stock

Company stock can qualify for favorable tax treatment if certain requirements are met. If you rolled over your company stock into an IRA, you might end up paying much more in income taxes down the line. Keep in mind, however, that too much exposure to a single investment is very risky.

If you’re in this situation, we recommend consulting a financial professional who understands your personal circumstances and can advise you on the special tax issues around company stock.

Ultimately, the decision of whether to rollover the 401(k) depends on the specifics of your financial situation. If you’ve separated from your employer and have old workplace accounts sitting around, we can take a look at your overall picture and help you identify the solution that’s right for your needs.

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on May 13, 2015 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.