Potential Benefits of Rolling Over Your 401k into an IRA:
Working with an Advisor
There are many benefits in working with a competent and caring advisor. The top qualities I would recommend looking for are: someone you trust to guide you through all the different seasons of the market and someone who will build you a customized financial plan with a roadmap on how to achieve your long-term financial goals.
Typically, 401k plans offer you a limited menu of investment options to choose from. With an Individual Retirement Account (IRA) you have thousands of choices. Options many times equal opportunity.
Time Isn’t on Your Side
As you are starting in your new position you may have a lot on your plate and therefore not a lot of extra time. By leaving the funds in your old 401k you run the risk of not having the time to properly monitor and manage your investments. In my experience, most people spent more time planning their last vacation than they did working on their finances (and they typically are not in the middle of a job transition).
Gaps and Redundancies
Another potential benefit of transferring/consolidating your retirement accounts is to get rid of gaps and redundancies. Gaps can occur when you do not have exposure to certain areas of the investment universe. Redundancies can occur when you have too much exposure to certain areas of the investment universe.
Some 401k’s have relatively low fees, and some have higher fees. In some cases, you may have lower fees within an IRA than you have in your old 401k. Do you know what you are paying? Transparency will lead to better informed investment decisions.
Things to go over before rolling over your old 401k:
Do you have an outstanding loan against your 401k?
When you change jobs and have a loan against your 401(k) even if you decided to leave the old 401k in place, after separation of service you will have a limited amount of time to pay off the loan, in some case 60 days. Check with your plan administrator to find out exactly how long you have to repay the loan. If you do not repay the loan, the remaining amount will be treated as a taxable distribution and you will receive a form 1099 for the current tax year.
Do you own any company stock?
If you do, you will want to learn about net unrealized appreciation or NUA for short. Basically, when you transfer company stock out of your 401k you have two choices: Roll it into an IRA or transfer the company stock into a taxable account and rollover the remaining 401k funds into an IRA. If you rolled over the company stock into an IRA, when you eventually pull those funds out you will owe income tax on the total amount distributed. If you instead transfer the shares of your company stock into a taxable account, you will only owe income tax on the cost basis and any gains will be taxed at the current long-term capital gains rates when you decide to sell. If you think you may qualify for this special tax treatment, talk with your advisor and/or tax preparer for more details.
Make Sure the Check is Not Made Out to You
If the check from your 401k provider is made out to you, by law they must withhold 20% for taxes. The problem arises when you deposit the check into an IRA. You will have to come up with the 20% that was withheld for taxes out of your own pocket. Otherwise the 20% is treated as a taxable distribution. Additionally, if you are under 59 ½ you will also have a 10% penalty assessed to the total distribution amount.
Per the Bureau of Labor Statics, the average person works for 11 different employers from ages 18 – 48. That can quickly turn into a lot of random accounts to try to track and manage; not mention you could end up with gaps or redundancies and fee inefficacies. For your own peace of mind, I suggest that you consolidate your accounts whenever possible. You will have a much better picture of your overall financial life and more time to spend on the things you enjoy.
As you can see, there are a lot of things to consider when decided the best course of action with your old 401k. Please feel free to contact us if you would like to discuss any of these thoughts in more detail.
David R Henderson
This is being provided for informational purposes only, and should not be construed as a recommendation to buy or sell any specific securities. DCH Wealth Management, nor any of its members, are tax professionals or are able to provide tax advice. For personalized tax advice, please contact your tax professional. The views expressed are those of DCH Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates.