Benefits of Rolling over a 401(k)

Schedule your consultation with a CERTIFIED FINANCIAL PLANNER™

Benefits of Rolling over a 401(k)

by | Jan 24, 2019

When you start a new job, enrolling in the company sponsored 401(k) plan is a no-brainer, but how much thought do you put into the 401(k) you had at your old job?
 
When you leave a company where you’re contributed to an employer-sponsored retirement plan, you have two options. First, you can do nothing and leave the money where it is or you can roll over the balance into your new 401(k) or an individual retirement account (IRA).
 
Most people choose to leave the money where it is. This seems like a simple solution but the truth is that there aren’t many benefits to leaving your money in an old 401(k). In fact, there are actually some downsides.

Benefits to Consolidating 401(k)s
If you’ve been thinking about consolidating or are starting a new job soon and considering what to do with money in the plan sponsored by your former employer, here are some of the benefits of taking the jump into consolidation.

Investment Options
Most 401(k) plans offer basic portfolio options often curated based on your age or year of retirement. They provide a bit of variety and usually include U.S. stocks and bonds as well as international stocks.
 
If you want to make other investments, like emerging market stocks or real estate investment trusts, an IRA might be a better choice. It will give you access to thousands of different options from funds to individual stocks and bonds.

Easier Monitoring
Centralizing your retirement savings into one place gives you a much better sense of where you stand and can help make sure you stay on track. It’s much easier to ensure an optimal investment mix and to see to it that everything is working together to help you reach your goals.

Reduction in Fees and Commissions
Using multiple providers can mean you’re paying a lot more fees than you need to. Generally, the more you have invested with a financial provider, the more likely they are to lower or reduce account fees and other expenses so it makes sense to have all your money in one place.

Tax Opportunities
Having all of your retirement funds placed with one service provider can make it easier to develop the most tax-effective investing strategy. It’s easier to monitor gains and losses plus you can see all of your holdings in one place.

Retirement Withdrawals
If you are of retirement age, making withdrawals from multiple 401(k) accounts can be time-consuming and even a little confusing when it comes to managing balances and taxes. Transactions are much easier to monitor from a single account.
 
One big benefit to using an IRA over a 401(k) is what happens to the balance of the account once it’s passed on to your beneficiaries. In the most straightforward scenario, your spouse is still alive and receives your 401(k) assets. They’ll have to take annual withdrawals based on life expectancy.
 
If your 401(k) gets passed on to your children, the plan can require them to withdrawal the total balance within five years. Since this money isn’t taxed until it’s withdrawn, this can cause a bit of a tax headache for your heirs.
 
Withdrawals from an IRA, however, are tax penalty free as long as you are of retirement age. Your children or heirs other than your spouse can withdrawal based on life expectancy without worrying about the tax penalties.

Other Things to Consider
Before making the jump, it’s important to consider every factor, including the benefits of leaving your money right where it is.

Costs
If you work for a large Fortune 100 company, the plan and number of participants itself is an asset. Why? The expense charges are typically very low because of the sheer volume of accounts associated with a large company. If these savings are significant, it might be worth leaving the funds where they are. Typically, there are fees involved in maintaining an IRA account including a termination fee.

Employee Stock
If part of your retirement plan includes shares of stock in the company you used to work for, you may lose them if you move your money from the company fund. Carefully consider the financial implications of consolidating and whether or not it’s worth the benefits. There may not be a fee for leaving the money in the plan and this is not a taxable event. 

Withdrawals
While it may be tempting to use all of the changes happening as an excuse to take a withdrawal, there are some big financial consequences to doing so. First, if you’re not age 59 ½, you’ll be hit with a 10% early withdrawal penalty and you’ll be losing the potential earnings that money can make between now and when you retire. You also have to pay income tax on this money which may lead to owing significantly more come tax time.

How to Do a Rollover

The process of rolling over your 401(k) isn’t as complicated as you might think. You may have to pay a one-time fee which is typically around $50. In the long run, though, this is a small fee and the benefits can make up for it.
 
There are two ways to approach a rollover. The first option is a direct rollover. This is the easiest because it leaves you out of the process. All you have to do is fill out some paperwork giving permission for the transfer. The firm where your old 401(k) is will contact the firm where your IRA or new 401(k) is and transfer the money directly.
 
The other option is an indirect rollover. In this case, your old 401(k) provider will issue you a check for the balance of your account. It’s then up to you to deposit it into your new account.
 
If you’re confident in investing and all the fees and tax implications, an indirect rollover could be a reasonable option. That said, a direct rollover is usually the better choice. It’s simple and allows the professionals to take care of all the fine details.  Please note that not all employer plans accept rollovers.  Be sure to check.

Think It Through

Decisions like this aren’t to be made lightly. Take your time and consider the pros and cons of all of your options. When it comes to big financial decisions, it’s always a good idea to consult a professional who knows the entire process inside and out. Don’t hesitate to ask for help. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets.
 
Any opinions are those of the author and not necessarily of Raymond James.  Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

0 Comments

Ways To Contact Us

Schedule your consultation with a CERTIFIED FINANCIAL PLANNER™

SCHEDULE A COMPLIMENTARY
​15-MINUTE STRATEGY SESSION TODAY