Author: Trevor Bush
The decision on whether or not to perform a 401(k) rollover often involves more variables than most people realize. The first question people should ask themselves is why they would be doing this. Is it to have more control over their retirement assets? Perhaps less? Is it to have lower fees or perhaps more investment options?
There are just as many reasons for rolling over a 401(k) to an IRA as there are to retain the funds at the 401(k). Reaching out to a fiduciary who can advise on all issues, including tax implications, and who has your best interests in mind, should be the first step when exploring 401(k) rollover options.
401(k) Rollover Rules
What should you know about how to roll over a 401(k) to an IRA? First of all, you should be aware that if you are currently employed by the company offering the 401(k) plan, there are some circumstances in which you may not be able to roll over the funds into an IRA at all. Two ages that generally may allow you to take action even if you still are employed by the company which holds your 401(k) are 55 and 59½. The elections that can be made will be discussed in a follow-up article.
Secondly, even if you are able to roll over your 401(k) there are a few reasons why you may want to reconsider. Things like creditor protection, the ability to take loans, certain tax consequences and access to conciliatory services may be good reasons for someone to take no current action. As for how to roll over a 401(k) from a previous employer—if one leaves his or her job, there are usually very few restrictions to rolling over one’s 401(k) to an individual IRA. In these cases, one would simply have to open an account and request the assets be moved over to that newly created IRA.
Benefits of 401(k) Rollover
- More control over investment choices – many IRA providers offer thousands of options, including commission-free Exchange Traded Funds and no-transaction-fee mutual funds.
- More control over fees – depending on your 401(k) plan, management fees can significantly diminish returns over time, whereas an IRA can minimize fees with low-cost funds.
- Simplicity – the ability to consolidate all 401(k) accounts and IRAs into just one IRA makes it easier to keep track of balances and your overall allocation of assets to stocks, bonds and cash.
<H2>Drawbacks of 401(k) Rollover</H2>
- Less protection from creditors with an IRA – retirement plans such as 401(k)s offer protection against bankruptcy claims and lawsuits, whereas contributory IRAs offer only a limited protection against bankruptcy.
- Loss of the ability to access loans – many 401(k) plans allow you to borrow against your funds as long as you’re actively employed wit the company, but IRAs don’t permit loans.
- Loss of the benefits of group buying power (401(k)s potentially have lower fees).
- Loss of preferential tax treatment of low-basis shares of consolidated stock – at retirement, all shares will be taxed at regular income tax rates, which could be nearly double capital gains rates.
- Loss of the impact of RMDs if working past age 70½ – IRA owners must begin Required Minimum Distributions when they turn 70½, but 401(k) plans allow you to delay RMDs as long as you’re still employed at the sponsoring company throughout the year.
- Less flexibility to tap your funds early – if you take early retirement or are laid off, you can access your 401(k) funds without a penalty after age 55 (though you’ll still pay taxes); an IRA requires you to wait till age 59½, otherwise you’ll pay a 10% penalty plus tax, or need to set up a cumbersome program of regular, limited withdrawals lasting at least five years.
How to Roll Over Your 401(k)
- Open an IRA at a firm that offers the investment selection and fee structure you prefer (refer to the checklist below).
- Clarify with your 401(k) plan administrator that if you are still working, and over age 59½, you are able to take an in-service withdrawal.
- Verify that you do not have after-tax contributions. (If you do, look to open either a Roth or an after-tax account).
- Verify that you do not have any low-basis stock (a consolidated position).
- Initiate a direct rollover from your old 401(k).
1. Opening an IRA
- Ensure you have a handle on the tax consequences, if any – this includes treatment of company stock and after-tax contributions.
- Ensure you have a handle on the fees – evaluate fund expenses, as well as IRA-management fees, if any.
- Request a cash flow or distribution strategy.
- Look into Roth conversion options, if advantageous.
- Name proper beneficiaries.
- Create a financial plan – understand how your IRA fits into your overall financial picture and spending goals.
2. Moving your Money
- Clarify whether the assets are coming in-kind or as cash.
- Define the investment strategy – what specific IRA assets will you be buying, and why.
- Determine spending needs (if any) from your assets – select funds appropriate to short-term goals for any withdrawals anticipated in the near future.
EP Wealth Financial Services
Because of the many items to consider before rolling money from a 401(k) to an IRA, consulting a wealth advisor can be a wise decision. Protection from possible lawsuits, fees, taxes and your personal needs to access the funds all play roles. So does the reality that moving funds to your own self-administered IRA will effectively make you your own pension manager. Likewise, if you choose someone else to hold that responsibility, it would be in your best interest to ensure that the person/firm you work with is acting as a fiduciary at all times. Please feel free to reach out to me and my colleagues at EP Wealth Advisors with your questions about obtaining objective advice. Evaluating rollovers is just one of the many ways we are prepared to help you achieve your retirement planning goals.
Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice. Please consult a professional Financial Advisor, CPA, Tax Professional and/or attorney before implementing any of the approaches or strategies made referenced directly or indirectly in this report.
As applicable, please contact your current or former employer’s Human Resources Department, Plan Administrator, and other similar professionals to better understand the benefits available in a company sponsored retirement plan. Hiring a qualified advisor and/or financial planner does not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. All investment strategies have the potential for profit or loss.