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Should You Rollover Your 401(k)?

When you leave a job, you need to decide what to do with any funds you’ve invested for retirement via an employer-sponsored plan, such as a 401(k). Before we get into the pros and cons of the different options available to you, let’s recap what your choices are.

Options for 401(k) Funds When You Leave a Job

  1. Keep your money where it is, in your previous employer’s 401(k) plan.
  2. Roll your money into your new employer’s 401(k) plan.
  3. Roll your money into an IRA.
  4. Roll your money into a Roth IRA.
  5. Withdraw the money, or take a distribution.

It’s important to note that options four and five come with a few strings attached.

When you roll money into a Roth IRA, for instance, you need to pay income tax on the full amount that you roll over. While you can subtract this money from the rolled over funds, it’s important to plan for the tax ramifications. You may also have an option “4.5” to roll funds to a Roth 401(k), instead of a Roth IRA. We’re counting this as a half option because your new employer may not offer a Roth 401(k), meaning this wouldn’t be available to you.

Finally, if you withdraw your money, you’ll need to pay income tax on the full amount. Plus, if you’re younger than 59½, there’s a 10% early distribution penalty as well, unless you’re eligible for an exemption. Beyond these obvious drawbacks, removing money from a retirement account means you forego any potential for future, tax-advantaged gains on the money.

What Should You Do with Your 401(k) Funds?


Which option you choose depends primarily on investment selection, plan fees, and the complexity of your financial circumstances. Let’s dig into why each of these matter.

Investment selection

With employer-sponsored retirement plans, the plan sponsor determines which investments are available within the plan. In other words, the number and type of mutual funds, ETFs, and other investments that you have available to you vary. If your new 401(k) has better investment options, you may want to roll funds into the new account, and keep everything together. If neither has particularly good investment choices, an IRA might be helpful, since IRAs tend to offer the widest selection of investment options to choose from.

Plan fees

In the same way employers select the investments within the plans they sponsor, they often select a plan administrator to help with running the retirement plan. These administrators charge different fees and offer varying levels of support. If the plan fees and benefits are better in your new plan, you might roll your funds over. If they’re better in your existing plan, you might keep your funds where they are. If neither option suits, rolling over to an IRA might make the most sense. Some employer-sponsored plans come with higher fees for ex-employees than current employees.

Your financial circumstances

If you’re young and simply trying to set money aside for retirement, it may matter less where your savings are located. However, if you have multiple investment accounts or are saving for multiple goals, juggling multiple 401(k)s with different employers can start to get complicated. It can be harder to understand your overall asset allocation for instance, when you’re trying to assess what percentage of each account is in international stocks versus Treasuries, and so on.

Take a moment to consider your personal circumstances and review both the fees and available investments in your existing retirement plan as well as the retirement plan offered by your new employer.

401(k) versus IRA

There are a few considerations beyond fees, selection, and circumstances when it comes to choosing between a 401(k) and IRA.

Loans

Many employer-sponsored retirement plans give you the option to borrow against your 401(k) for specific circumstances. For instance, you may be able to borrow up to $50,000 to put toward the down payment on a home. (The actual amount you can borrow, sans penalty, depends on your account balance.) IRAs don’t come with this type of provision.

Bankruptcy protection

If you find yourself in financial distress, 401(k)s come with more in-depth bankruptcy protection than IRAs. (IRAs are only protected up to a certain amount, and protections may vary by state.)

Early withdrawal penalties

While both 401(k)s and IRAs come with a 10% early withdrawal penalty, in addition to income tax, if you withdraw funds before you turn 59½, 401(k)s come with an exception that IRAs do not. If you leave your job after age 55 (or 50 for some public sector jobs), this penalty won’t apply.

Customer service

If you decide you aren’t happy with your current 401(k), whether or not you can move funds to an IRA will depend on whether your plan sponsor allows in-service distributions. If, however, you aren’t happy with the financial institution that holds your IRA, you can request a direct transfer of funds to a new trustee or custodian at any time.

Should You Rollover to a Roth Account?


Whether you’re considering a Roth 401(k) at your new job, or rolling to a Roth IRA, there are a number of questions to think about that are specific to Roth accounts.

Tax

While you’ll need to pay income tax on any of the funds you rollover to a Roth account during the calendar year when you transfer the money, those funds continue to grow tax free and withdrawals won’t be subject to income tax in retirement.

Required Minimum Distributions (RMDs)

While traditional 401(k)s and IRAs require you to take minimum distributions once you reach a certain age, neither Roth IRAs nor Roth 401(k)s come with this provision.

Early withdrawals

Generally speaking, you can withdraw the principal amount invested into a Roth account—essentially, the money you’ve already paid income tax on—at any point without paying taxes or a penalty. Any earnings on those funds may still be subject to income tax and a penalty, depending on your age and personal circumstances.

Final Considerations

As you can see, there’s more than a few things to consider. Plus, evaluating the different provisions in one retirement plan can feel complicated—comparing several can feel daunting.

A financial advisor can help you navigate these questions. For instance, a Bogart Wealth Advisor can walk you through tax diversification—in other words, how to think about income tax in retirement. You may want to have some of your nest egg available to you tax free to lower your tax burden in your golden years.

Plus, an advisor can help you facilitate asset allocation across ALL of your various accounts, and not just a single IRA or 401(k). In other words, to help understand which of these options makes the most sense in your unique circumstances, contact a Bogart Wealth Advisor today.

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results. 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 (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level (s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, 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 blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at bogartwealth.com


Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
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