To roll or not to roll. THAT is the question.
Well, that’s the question if you have a 401(k) from a previous employer.
If you’ve changed jobs and are wondering what to do with your 401(k)account, you have
four choices: leave it where it is, roll it into your current employer’s plan, roll
it into an IRA, or cash it out.
There’s no one right answer for everyone, but there are a few key considerations that
can help you decide: fees, access to your money, and investment choices.
First up: fees.
401(k) accounts can carry a number of fees, which differ based on the provider.
When it comes to fees, the most important thing to understand is what you’re paying
and whether the features of the plan justify it.
The most common is management fees, which are associated with the mutual funds or ETFs
typically available in retirement accounts. These are usually expressed as percentages
called expense ratios.
But there are also plan fees. 401(k)s, for example, can be loaded with both upfront and
hidden costs like admin fees, audit fees, and asset fees.
While these fees can be avoided or reduced by investing in an IRA, this is not always
the case. It’ll ultimately depend on which brokerage you choose, what funds you invest
in, and how often you trade.
The thing to keep in mind is while fees can add up and eat into your retirement savings,
it doesn’t mean the cheapest solution is always the best. Depending on your needs,
access to advice, retirement planning tools, or better investment choices may be worth
paying the higher fees.
Another consideration when deciding whether to roll is when you think you’ll need to
access the money.
Depending on your age, withdrawal penalties and conditions may apply.
If you think you’ll need to withdraw funds from your retirement account before the standard
59 Â½ age requirement, you might consider rolling into your current 401(k).
Thanks to an IRS rule known as the rule of 55, if you leave a job any time during or
after the calendar year in which you turn 55, you can start taking money out of your
current 401(k) penalty-free for any reason.
Just know the 59Â½ age requirement still applies for any money in a previous employer’s 401(k),
which means you’ll pay the penalty if you try to withdraw money early.
On top of that, some 401(k)s also allow you to take out a loan of up to $50,000 from your
current account. And you’ll have up to five years to pay it back.
Keep in mind that with an IRA, you can only withdraw money early for qualified expenses
like medical bills and education costs. You can also withdraw up to $10,000 for a first
home purchase.
Any other money withdrawn before age 59 Â½ must be repaid within 60 days or you’ll
face penalties.
While it’s generally best to keep your retirement savings invested, your unique circumstances
may require you to access your money early, and this may impact your decision about rolling
over. The third factor to consider is the type of
investments each account offers.
401(k)s tend to offer a limited number of investments chosen by a plan administrator,
often mutual funds or exchange-traded funds.
These choices sometimes come with high fees,
but there are some plans that do offer a variety of low-cost investments as well as investments
that may be unavailable elsewhere.
IRAs, on the other hand, tend to offer access to a much wider variety of investment choices,
including individual stocks.
One more thing regarding investment choices: did your previous employer issue company stock
through your 401(k)? If the answer is yes and the stock has grown in value, rolling
over could mean serious tax ramifications.
If this situation applies to you, talk to a tax professional to make sure you’re not
setting yourself up for a tax surprise next April.
So there you have it fees, access to your money, and investment choices.
These are three of the biggest considerations when it comes to deciding whether to roll
over a 401(k) from a previous employer.
The right choice for you depends on your unique financial situation. A little research now
can help ensure you’re able to thrive in your golden years.