Tips to Consider When Rolling Over Your 401(k)


by ReShelle Barrett, CFP®
Senior Vice President

Most people have changed jobs or left the work force at some point. This likely means leaving 401(k) accounts with old employers. Although some plans require in-active participants to distribute their account if the balance is under minimum, most will give you several options. Discussing these options with a financial advisor can ensure these savings are working toward your financial goals. Consider the following tips provided by FINRA (Financial Industry Regulatory Authority):

Evaluate your transfer options. You generally can keep some or all of your money in the plan, transfer to a new company plan (if the new plan allows), rollover your plan assets to an IRA, or cash out your balance. There are advantages and disadvantages to each. Most notably, you may have the option to take withdrawals from a 401(k) at age 55 without early withdrawal penalty as long as you are no longer employed with that company. Otherwise, distributions before age 59 ½ are subject to 10% penalty. However, rolling to an IRA gives the most flexibility in terms of how you can take distributions, investment choices, etc.

Think twice before you do an indirect rollover. With a direct rollover, the money goes directly from your 401(k) to either your new 401(k) or your IRA Rollover account. With and indirect rollover, you take the distribution first then later (within 60 days) redeposit the funds into your new account. This will create a mandatory 20% withholding for federal income taxes and possibly an additional 10% penalty.

Be wary of “Free” or “No Fee” claims. There is no shortage of financial firms that advertise rollovers and IRA-related services. FINRA has observed overly broad language in advertisements and other sales material that implies there are no fees charged to investors. Even if there are no costs associated with a rollover itself, there will almost certainly be costs related to account administration, investment management or both. Don’t rollover your retirement funds solely based on the word “free.”

Realize Conflicts of Interest Exist. Financial professionals who recommend an IRA Rollover might receive commissions or fees as a result. Be sure to discuss all of the advantages and disadvantages of rolling over plan assets before making a decision.

Understand fees and expenses. Know how much you are currently paying for your plan and compare that to fees and expenses of a new plan or IRA. For more information about 401(k) fees, see the Department of Labor’s publication, A Look at 401(k) Plan Fees. For IRA fees, ask your financial professional to provide you with information about fees and expenses.

Have a serious discussion with your financial or tax professional. Ask about tax consequences, investment services, as well as differences in fees and expenses. As with any investment, if you don’t understand it, don’t buy it.

Consider tax implications of appreciated company stock. Many companies reward employees with shares of stock. If you’re considering a distribution of company stock when you leave the company, be aware that IRS rules might allow you to defer paying taxes on the appreciation (called “net unrealized appreciation”). Consult your plan administrator and financial tax professionals to discuss the various options.

Making these decisions can obviously have a significant impact on your current and future financial plan. In most instances, you can take your time. So do just that and be sure to review all your options before making a critical decision regarding your nest egg.

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