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To Roll or Not to Roll-Over Your 401k? Thumbnail

To Roll or Not to Roll-Over Your 401k?

Financial Planning Investments Retirement Planning

Congratulations! You’ve just landed your dream job with a new employer or have finally made the transition into your long-awaited next phase (aka retirement). After taking some time to celebrate these milestones, you may ask yourself, “What should I do with my old 401k now that I’m no longer contributing to it?”.

Whether you have multiple plans from different employers that you want to consolidate, or you just have one account that’s still lingering out there, you will want to work with a trusted financial advisor like Woodward Financial Advisors to help determine if rolling over your 401k or other qualified retirement account into an IRA is the best plan for you. While there are many benefits to rolling over your account, it’s certainly not the right move for everyone.

To help get the conversation rolling (pun intended!), here are some reasons that you may or may not decide to move your 401k into an IRA. The following are true for most qualified retirement plans – including 401k, 403b, and some other less common types of retirement accounts or pensions.

Reasons to initiate a rollover:

  • More investment options: Many employer plans are limited in their investment menu and rolling over your 401k to an IRA can allow access to greater diversity and better quality of investment options.         
  • Lower fees and expenses: The limited choice of investment options in an employer retirement plan can sometimes have higher expense ratios and operating costs than is ideal. Over time, these higher costs can eat into the overall return on your portfolio’s investments.
  • Peace of mind: If your financial advisor doesn’t have the ability to manage your 401k at the current custodian, rolling it to an IRA can allow them to directly manage the investments, rebalance the allocation, as well as help with Required Minimum Distributions when the time comes.
  • Simplicity: If you have an existing IRA, rolling your 401k over will give you one less account to manage and keep track of. If you have multiple 401ks, you can combine all of them together within your one IRA account.

Reasons to reconsider a rollover:

  • Backdoor Roth contributions: If you don’t have an existing IRA account balance and are still earning income, you may have the ability to smoothly make nondeductible IRA contributions and then convert those dollars to your Roth (also known as a backdoor Roth contribution). Rolling your tax-deferred 401k dollars into an IRA when you plan to make backdoor Roth contributions can muddy the water between the tax-deferred and after-tax contributions, adding an administrative hassle and potently eroding the tax benefit of completing these types of contributions. This is due primarily to what’s called the “pro-rata rule”.
  • Creditor protection: Your 401k offers federal (ERISA) protection from creditors and lawsuits. IRA accounts offer some protection from the state, but exact protection limits can vary depending on where you live and are typically less robust than ERISA protections.
  • Bailey Act Protection: In the state of North Carolina, if you were fully vested in certain types of employer plans before 1989, then your funds may be exempt from taxation at the state level upon distribution. To maintain the Bailey Act protection, the dollars must remain within an eligible plan and cannot be rolled into an IRA.  
  • Accessibility: You must be age 59 ½ to access dollars from your IRA penalty-free, however, in a 401k you may be allowed to access your money penalty-free at age 55 if you are fully retired and certain criteria have been met. If you plan to retire before age 59 ½ and are relying upon the money in your 401k to fund your retirement (as opposed to accessing dollars from a taxable brokerage account), then you may want to delay initiating a 401k rollover.  

For most people, rolling their 401k into an IRA is the recommended choice and can clean up their financial picture while offering more flexibility for their investments. Talk with your advisor today to determine if a rollover is the right choice for you!



Written by Megan McManus, CFP®

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