Do you have more than one 401(k) account? Do you rollover your old 401(k) plans into an IRA? If you answered yes to one or both of these questions, the answer might not be as simple as you think. While it is true that if you roll over a 401(k) into an IRA will keep all your assets in a centralized location that may not be what is best for you in the long run. So how do you know when to roll over a 401(k) and when not to? Well, after looking at the following you should have a better understanding. And as always, when in doubt seek the guidance of a professional financial planner.
One of the main reasons you may want to leave your funds in an old 401(k) plan is that if you were 55 or older when you left that job you can take withdrawals without a penalty. If you had rolled that money into an IRA, you would be required to wait until age 59 ½ before you could make any withdrawals penalty free. And the penalty is 10% of the withdrawals plus any taxes you may owe as well. While that provision is only suitable for your current employment’s plan and not those you may have left prior to age 55 it is a substantial perk for those over the age of 55 but not yet 59 ½.
Similarly, if you plan on working past age 70 ½ you are not required to take a minimum distribution as long as you are still employed with that plan’s employer. Again, this does not apply to all your 401(k) plans just your current one where you are still working. Otherwise, you would be subject to a 50% tax on the minimum distribution you were to take. If this had been rolled over into an IRA, you are required to make a minimum withdrawal at age 70 ½ regardless of your employment status. Here it is again to your benefit to keep the money in the current plan. And in some instances you can roll a 401(k) plan from older employers ‘plans into your new employer’s plan. This is something I do advocate provided the new plan has a good selection of investment options to pick from. Otherwise, I recommend keeping the older plan in force if it meets some of the other criteria mentioned in this post.
Now this is one that has some serious tax implications to you if you have company stock in a 401(k) plan. In most instances, these plans are taxed at the higher ordinary income rate when you make withdrawals. That, however, is not the case with company stock in the company’s 401(k) plan. The sale of this stock within a plan is not taxed as ordinary income but rather as a capital gain. Had this particular 401(k) been rolled over into an IRA it would have been taxed at the higher ordinary income rates. Pay particular attention to this provision of the 401(k)’s as this can save you some serious taxes if you are the owner of company stock in a 401(k) plan.
Now if your old plan has some good investment options or options that have low fees yet produce good returns there may not be a reason for you to roll over the 401(k) into a new plan or an IRA. In the instance where your older plans are sufficient, keep them intact and do not do anything with them provided you have at least $5,000 in them when you leave your old job in most instances. The key when you take this approach is to keep all of your contact information up to date with the old plans administrators so they will not lose you or your funds. But if your older plans have poor investment choices or funds with unusually high fees it may make sense to take that older money with you when you leave the company.
Now this is the one where many people get caught up, and that is there is no timeframe as to when you have to move an older 401(k) plan. You can take a week or a year or even ten years to move old plans into either a new plan or an IRA. The exception in many cases is when there is less than $5,000 in the old account you may have to make a decision sooner rather than later. Take your time and do your homework before you make any decision on where to put these older 401(k) funds. Remember, there is no set timeframe for you to act.
If you switch jobs or just have older 401(k) plans out there it is important to keep things up to date despite the fact you may or may not have moved the funds around. Yes, it can make things simpler if you take the money with you but that may not be what is in the best interest of your bottom line and the account’s overall value. Just because you can do something does not mean you have to or even may need to. Always take a step back and evaluate the situation before you make any financial decision.
If you need any assistance or need further information, do not hesitate to contact me.
