Pros, Cons, Dos and Don'ts: 401(k) Rollovers

Something that inevitably comes up in almost every conversation with clients is - what do I do with my old 401(k)s? The root of the question is do I roll them over into an IRA or do I roll them into my current 401(k)? Like most financial questions, there will never be a perfect blanket answer. What I will attempt to do is break down real life pros, cons, dos and don'ts from my experience.

Pros

• More choices and flexibility within an IRA than most 401(k) menu of investment options.
• Greater control: With an IRA, you have more control over your investments, including when and how you withdraw funds.
• Simplified management: Consolidating multiple retirement accounts into a single IRA can make it easier to manage your investments and keep track of your retirement savings.
• Option to have your investments professionally managed. This could also mean higher fees associated.

Cons

• Loss of access to loans: Many 401k plans allow participants to take out loans against their accounts, while IRAs do not. Rolling over your 401k into an IRA could mean losing this option.
• No early withdrawal penalty exception: 401k plans offer an exception to the early withdrawal penalty for certain events, such as a first-time home purchase or higher education expenses. IRAs do not offer the same exceptions, which could be a disadvantage for some individuals.
• Required Minimum Distributions (RMDs): Once you turn 72, you are required to take RMDs from a traditional IRA. This requirement does not apply to 401k plans if you are still employed by the sponsoring company.
• Loss of creditor protection: Depending on the state you live in, 401k plans may offer greater protection against creditor claims than IRAs. Rolling over your 401k into an IRA could result in a loss of creditor protection.

Dos

• Do research your options: Before rolling over your 401(k) to an IRA, do some research on the different types of IRAs available and their associated fees, investment options, and other features.
• Do consider tax implications: Depending on the type of 401(k) you have and the type of IRA you choose, you may owe taxes on the amount you roll over. It's important to understand the tax implications of your decision and to consult with a tax professional if you have questions.
• Do consider your investment goals: When choosing an IRA, consider your investment goals and risk tolerance.
• Do keep good records: Keep records of all transactions related to your 401(k) rollover and IRA account, including account statements and confirmation of rollover requests.
• Do consider consolidating accounts: If you have multiple retirement accounts, consider consolidating them into a single IRA for easier management.

Don'ts

• Don't cash out your 401(k): Cashing out your 401(k) instead of rolling it over to an IRA can result in significant tax penalties and lost retirement savings.
• Don't hear only one opinion: this can lead to doing something that may be only in the "sellers" best interest. Rolling 401(k) assets into a fixed or variable annuity (in my opinion) generally makes zero sense.
• Don't take a 'set it and forget it' approach: Some people choose to just leave all their former employer 401(k)s alone. It can work out, but most times it results in not being invested according to your goals. I've seen cases where old 401(k)s were completely in cash for many years.
• Don't forget to update beneficiaries: When you roll over your 401(k) to an IRA, be sure to update your beneficiary information to reflect your current wishes.

This may seem like a minor item in your overall financial plan and life. However, if left unattended, it could mean the difference between tens of thousands or hundreds of thousands over your lifetime.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.