Should I Rollover My 401k?

11/16/2017 - Perhaps. For most, it makes sense to roll your funds out of a 401k (this includes a 403b, 401a, or whatever type the deferred employer plan may be). Though, there are a few exceptions that one must consider before pulling the trigger. This includes fees, any concentrated stock positions, and other company benefits.

When you leave your company, you essentially have four 401k options to consider.

Your Four 401k Options

1. Completely cash-out your funds from your 401k (not recommended)
- You do NOT want to do this outside of any cosmic cataclysmic circumstances (e.g. the apocalypse has arrived, the moon is crashing into the Earth, etc.).
- If you do, be prepared to pay the IRS as this is considered a taxable event. I recommend that you talk to a tax professional before you consider this option. 401k distributions can be taxed at the ordinary tax rate plus a 10% penalty if you are under 59 ½ years of age.

2. Leave your funds at the old 401k

3. Roll your funds to a new 401k (your new employer)

4. Roll your funds into a Rollover IRA (Individual Retirement Account)

Of these four options, there are really only three non-taxable paths you will want to consider: Leave your funds where they are, roll them over to another 401k, and roll them over to an IRA.

Source: 401krollover

Reasons To Keep Funds At 401k

Option 2 & 3: There are a few good reasons why you would want to keep your funds at a 401k plan. The biggest reasons include:

1. Lower Fees: If the plan has rock-bottom fees, then it probably makes sense to have your funds there, whether it is the old or the new 401k plan. Though, most discount brokerage companies have access to extremely cheap products, such as Index ETFs (e.g. Charles Schwab, TD Ameritrade, etc.)

2. Stronger Protection Against Lawsuits: 401ks are protected against lawsuits and bankruptcies while IRAs are only protected against bankruptcies up to $1.28MM.

3. Ability to Borrow Against Funds: You cannot borrow against an IRA, but some employers allow their employees to borrow against their 401k balance (amount depends upon the plan). While I rarely think this is a good idea, it may be helpful under certain circumstances.

Why You Should Rollover To IRA

Option 4: While credit protection is weaker and while you cannot "borrow" against an IRA, there are many advantages to rolling your funds to an IRA. These include:

1. Better Investment Options: 401k’s are notoriously limited with their investment options. IRAs open the investment universe to all mutual funds, individual stocks and bonds, ETFs (my favorite), and thousands and thousands of others. You can also hire an investment advisor to manage your IRA if you are unwilling/unable to (like us!).

2. Roth IRAs: Most 401k's do not offer a Roth option.  As a recap, a Roth IRA requires you to pay tax at the point that you put funds into the Roth, but grows tax free and can be distributed tax. This can provide tremendous value down the line. If you have a Traditional/Rollover IRA, you have the option of converting this account to a Roth. We work with the best Tax Attorneys/CPAs in San Diego when considering and planning for this option.

3. Can Take Early Distributions From A Roth: Well, technically these aren't "early" distributions, but you can take money out of the account penalty free if you're under 59 1/2 years old. Of course, there are exceptions (contributions vs. earnings, down-payment for your first home, etc.), but the flexibility the account offers is fantastic.

4. Fewer Rules / Greater Opportunities: 401k's are heavily regulated, limiting the number of investment opportunities available to those accounts. IRAs are standardized by the IRS, allowing multiple brokerages to follow the same rules.

5. Better Beneficiary Selections: IRAs often allow greater flexibility when selecting your beneficiary. Many 401ks usually offer only one primary beneficiary.

6. Consolidation: Most people have 7 careers throughout their lifetime, often leaving old 401k's behind. Keeping your funds within one single acocunt can make your financial life simpler. Rolling your 401k into an IRA is a free, tax-advantaged process.

If you are considering rolling over your 401k and would like guidance on the procedure, we are more than happy to answer any questions you may have. Please do not hesitate to contact us.

 

Ryan Hughes
Bull Oak Capital
Bull Oak Newsletter
11/16/2017


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