Do you have many 401(k) accounts? Are you considering rolling over a 401(k) into an IRA account? Before you take action on older 401(k) accounts there are some things to consider prior to putting those funds into an IRA account. Sometimes it is not in the best interest of the owner of a 401(k) to roll these accounts into IRA accounts. The notion of rolling a 401(k) into an IRA account may go against what many financial planners advise. Everyone needs to look at their situation and not take a generic view of someone who may or may not know your circumstances.
If you are between the ages of 55 and 59 ½, you may want to consider leaving those funds in your 401(k) account for one main reason. If you are between these two critical ages, a rollover IRA may not be in your best interest. Yes, it does make sense if you are still working to consolidate many 401(k) accounts into one account for ease of management and tracking. Many 401(k) plans will allow you to roll over prior plans into your existing plan so check with your plan’s administrator. That is one way to consolidate multiple 401(k) accounts into one central location. Now if your current employer does not allow this I do recommend doing a rollover of old 401(k) accounts into an IRA. But if you are currently working for the company that administers your 401(k) plan and are over the age of 55 here is the benefit of not rolling that 401(k) into an IRA. As most everyone knows who has a 401(k) or an IRA, you cannot make withdrawals until the age of 59 ½ without being hit with a 10% penalty. Here is the exception to that rule. If you are over the age of 55 and separate from your company, you are allowed to access the funds from that 401(k) account without penalty. Now it is apparent why rolling older 401(k) plans into your existing plan is a plus as this rule will only apply to the plan in which you retired. Also, if you had rolled a 401(k) into an IRA you are bound by the 59 ½ age limitations for withdrawals.
The next reason is not nearly as widely known but is one that is very effective if you can indeed use it. In the instance where you can actually use this technique consult a tax professional or a Certified Financial Planner to ensure you do not do more damage than good. If you have, stock in the company you work for that is in your 401(k) this tip is for you. Now it is important that you own the stock of the company and not a fund that mirrors the company stock. Where this technique works is when the stock has appreciated a great deal. In this case you take the amount that you contributed in the 401(k) account that is invested in actual company stock and transfer the stock to a brokerage account. This technique is called a Net Unrealized Appreciation transfer. Here you will be responsible for the taxes on the amount your contributed to the 401(k) plan and not the value of the stock you transfer. Then when it is time to sell the stock you will pay taxes on the capital gains of the stock instead of regular income taxes had it remained in the 401(k) or a rollover IRA. As you will pay taxes on the amount, your originally contributed in the 401(k) this distribution could cause you to bump up into a higher tax bracket. For this reason, you need to seek the advice of a financial professional when you use this method.
A third reason that many overlook while trying to consolidate accounts and centralize funds is a 401(k) plan offers excellent investment options. Now investment choice is not the only thing to consider here as you need to think of the fees the plan charges as well. I know in the case of my retirement account, the Thrift Savings Plan, we have adequate investment opportunities and some of the lowest fees I have seen in any funds. And yes this even includes some of Vanguard’s basic indexed exchange traded funds that have some of the lowest fees in the industry. Do your homework and consider all the variables before you rollover a 401(k) into an IRA.
Now I am not saying that you should never roll a 401(k) account into an IRA because there may very well be some reason to do exactly that. But before you do you need to examine all aspects and figure out what the consequences will be if you do. Many people do not feel comfortable managing their money and seek financial planners. While there is nothing wrong with that and it may very well benefit you, not everyone needs the assistance of financial planners.
If you need additional information or have any questions feel free to contact me.
