Answers ยท 401(k) Rollover
Is it better to roll over your 401k or leave it?
Neither is automatically better. Leaving an old 401(k) where it is can keep things a rollover gives up: penalty free access if you left the job at 55 or later, stronger creditor protection, and sometimes cheaper institutional pricing. Moving it makes sense when the plan is expensive, the fund lineup is poor, or you have lost track of it. Read your own plan first.
There is no default answer until someone reads your plan
An old 401(k) has four possible homes. The plan it is already in, your new employer's plan, an IRA, or your bank account. Only the last one is usually a mistake.
Which of the other three wins depends on the document that governs your specific plan. Two people can ask this on the same day and both get a different right answer.
So the better question is this. What does my current plan give me that I would be handing back, and what is it costing me to keep it?
Leaving it can protect things a rollover gives up for good
You rarely see these in rollover articles, because none of them create a sale.
Access at 55. If you left that employer in or after the calendar year you turned 55, you can take money out of that plan without the 10 percent early withdrawal penalty. For qualified public safety workers it is 50. Roll the same money into an IRA and that door stays shut until 59 and a half. If you retired early and might need the money before then, this rule can outweigh everything else here.
Creditor protection. A 401(k) is covered by federal ERISA protection, which is broad. IRA protection is narrower. Outside of bankruptcy, California protects IRA money only as far as a court agrees you need it for your support. If you work in a field where people get sued, take that seriously.
Cost. Big plans can often buy institutional share classes a retail account can't get. Small plans are often the opposite. Either way, the fee comparison has to be run, not assumed.
Employer stock. If company stock inside the plan has grown a lot, a rule called net unrealized appreciation can let you pay ordinary income tax on what the shares cost and long term capital gains rates on the growth. Roll that stock into an IRA and the treatment is gone. Talk to a CPA before that money moves.
Backdoor Roth contributions. Pre tax money sitting in an IRA drags the pro rata rule into a backdoor Roth. Money sitting in a 401(k) does not. If you do backdoor Roths every year, a rollover can break them.
Cost, clutter and a small balance are the real reasons to move it
The plan is expensive or the funds are weak. Pull the plan's fee disclosure, not just the fund names. High admin fees stacked on expensive funds is a slow leak, and over a couple of decades it adds up.
You have lost track of it. Nobody rebalances an account nobody looks at. The beneficiary form on it is often ten years old and naming the wrong person. Pulling accounts together just lets you see what you own.
The balance is small enough to get kicked out. Plans can force out balances up to 7,000 dollars after you leave. Under 1,000 can be mailed to you as a taxable check. In between, the plan can move it into an IRA it picks, where the money often sits in cash for years. If you are in that range, decide before the plan decides for you.
You plan to do Roth conversions. Converting a chunk in a low income year is easier to control from an IRA than from a former employer's plan.
One more thing on the new employer option. If you are still working and might ever want a loan against retirement money, only a current employer's plan that allows loans can give you one. An IRA can't.
If you move it, how you move it matters more than where
Ask for a direct rollover, sent straight from the plan to the new account. Not a check made out to you.
If the money is paid to you instead, the plan has to withhold 20 percent for federal tax. You then have 60 days to deposit the full original amount. That means covering the missing 20 percent out of your own pocket and waiting until you file your return to get it back. Miss the 60 days and the whole amount is a taxable distribution, plus the penalty if you are under 59 and a half.
This is the most common expensive mistake in this whole area, and one phrase on the phone avoids it: direct rollover.
If you are still working past your required minimum distribution age and own 5 percent or less of the company, your current employer's plan can usually let you delay those withdrawals until you retire. An IRA has no such exception. The RMD age keeps moving under current law, so check the year you are actually in.
Most of what you read says roll it over because that is where the money is
A 401(k) sitting at a company you left pays nobody. Move it into an IRA and it can be managed for an ongoing fee or placed in a product that pays a commission. That incentive explains why the internet has far more articles pushing rollovers than explaining the rule of 55.
We have the same incentive, so here it is out loud. opfinances.com is a licensed insurance agency. We are not a financial advisor and not a fiduciary, and we are paid a commission by the insurance company when somebody buys a product through us. This is general education, not investment, tax or legal advice about your situation.
Plenty of people who ask us this end up leaving the account right where it is. If your plan is cheap, the funds are fine, and you retired at 56, the right move might be to update the beneficiary form and leave it alone. That is a fine outcome of a first conversation.
Before you decide
Questions worth asking.
What year did I leave that employer, and was I 55 or older in that calendar year?
What are the plan's total yearly fees, admin and fund level, in dollars on my balance, and what would the new account cost in dollars?
How are you paid if I move this money, and how are you paid if I leave it where it is?
Is there employer stock in the account, and has it grown a lot since I got it?
Who is named as beneficiary on the account right now, and is that still right?
If I move it, will this be a direct rollover with no check written to me?
Related
Do I have to move my 401(k) when I leave a job?
Usually no. Most plans let former employees stay, and there is no deadline forcing you out. The exception is a small balance. Plans can force out accounts up to 7,000 dollars, so if yours is under that, the decision has a clock on it.
Is rolling over a 401(k) taxable?
A direct rollover between retirement accounts is not a taxable event. It becomes taxable when the money is paid to you and not redeposited within 60 days. Rolling pre tax money into a Roth IRA is a conversion, and that is taxable in the year you do it on purpose.
Should I roll over my 401(k) when the market is down?
A direct rollover that moves the same holdings does not sell anything, so timing mostly does not matter. It matters if the new account cannot hold what you own, which forces a sale and leaves you out of the market for a while. Ask about that before you start.
How long do I have to roll over a 401(k) from a previous employer?
For a direct rollover there is no deadline. The 60 day rule people think of applies only when the money is paid to you personally, and it is one of the few deadlines in this area with almost no forgiveness.
Where this fits.
This question sits inside a bigger one. 401(k) Rollover walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.