Do you have old 401(k) plans from previous employers? Are you being advised to roll over old 401(k)’s into IRA accounts? Before you do there are some basic questions you may want to ask yourself before you make the switch. But as with everything each person needs to look at their unique situation before making any decision. Also, as with any financial decision you need to do your due diligence before you make any decisions at all and understand what the consequences may be for any decision you do make.
First you need to be aware that if you have more than $5,000 in a 401(k) account there is nothing that states you have to roll over the account into an IRA or to your new 401(k) plan if that is an option. For those with accounts over $5,000 it may be beneficial to keep the money where it is if fees are low and the investment options are sound. If not, then consider rolling the 401(k) into your new plan if that is an option as the fees in these larger plans are typically lower than mutual funds found in IRA’s. If the old plan is inadequate in it fees, management or investment choices and rolling the old plan into a new one is not an option then consider a direct rollover into an IRA. But again ask yourself these questions and consider others as well.
First you need to consider which retirement vehicle has the better investment opportunities for you long-term. IRA’s can open you up to thousands of possibilities, but they can also come with hefty fees associated with them. Go with the plan that allows you to invest the best way that fits your financial investment plan. Which leads me to the second question.
Are the fees more or less in the IRA or the 401(k)? Fees on larger 401(k) plans tend to be lower than the fees associated with mutual funds owned in IRA’s. Now many people do not think that small percentages of a point can affect the overall outcome of an investment. But if you think of $100,000 invested over a 30 or 40-year period the smallest of a percentage kept in your account can make a significant difference. Take that $100,000 and a 0.3% difference in the fees and over a 30-year period that makes a minimum of a 6% return can cost you almost $40,000 in lost income. That is a good reason to shop around and see what you will be paying in fees in both a 401(k) and an IRA.
The third question you must as yourself is what are the costs of rolling a 401(k) over into an IRA? Some IRA’s charge maintenance fees while others may charge an inactivity fee. With most 401(k) plans, there are fees associated with the individual funds and maybe a small administrative fee to manage your account. Check with the company you wish to have your IRA with to see about all fees, known and what may be attributed to unknown fees. Also, be aware that if you are not 59 ½ your old plan administrators will withhold your taxes and possibly the 10% IRS early withdrawal fees and when you roll that over into an IRA you will be held responsible for any money that was deducted. The best way to roll a 401(k) or an IRA over into a new account is to do a direct rollover where the old company pays the new one directly and no taxes or withholdings are kept from your balance.
The fourth area you need to consider is where do you have more flexibility? Most IRA’s will by their nature allow for more investment options just because you can shop around to find a brokerage house that will manage your account and they will have thousands of investment options for you to choose from. And in an IRA the chances for you to trade are increased as well as you are free to buy and sell as often as you want provided you are willing to pay any brokerage fees or commissions. But here is where an old 401(k) from your most current job may have benefits. Provided you are over the age of 55 you can make a withdrawal from the 401(k) of your last employer with no penalty imposed by the IRS unlike an IRA where you have to be age 59 ½ before no penalty is imposed.
Taxes is a moot point to a large degree as both IRA’s and 401(k) are taxed the same way as ordinary income. But when you sell the securities in one account to roll it over into a new account you will have a new cost basis in the new account. The big difference that in brokerage accounts that you are given say company stock would be beneficial as one where it is placed in a 401(k). The reason behind this is that in a brokerage account the proceed would be taxed as long-term capital gains which for most is 15% or 20% and it is lower than most of our ordinary income tax rate.
These are just some of the questions you may want to ask yourself before you roll a 401(k) into an IRA. Always do your homework prior to switching any financial accounts. And if you always need seek the advice of a qualified financial expert before you do anything that you do not completely understand. If you have any questions or need any additional information feel free to contact me.
