Should I Keep My Old 401(k) or Roll it over to an IRA?

Whenever you leave a job, you often have to decide what do do with your 401k.  In many cases, you may have several 401(k) or 403(b) accounts that you have accumulated over the years.  Should you roll them over to an IRA or just leave them where they are?

Remember that 401(k) participants, who are still working, can roll over funds into an IRA. This strategy can increase investment choices and benefit older investors who are still employed.

Typically, most people will initiate a 401k rollover to a traditional IRA.  Rolling your 401(k) into an IRA will give you more control over the assets, because you can pretty much invest it how you see fit. The range of investment choices available through a 401(k) plan is an important factor to consider when contemplating an IRA rollover.  There are many good mutual funds to choose from, while the average 401(k) plan has a handful of investment options.  This is usually the biggest reason to rollover the 401(k).

By determining how you want to invest your retirement money, you can choose the 401k or IRA that allows you to do it in a way you’d like. And, if you’re not sure, using professional help to decide how best to invest your retirement funds, can often help you determine which vehicle is best.

Another big reason to rollover your 401(k), is simplicity.  It’s much easier to manage fewer investment accounts.  Change jobs a few times, throw in an IRA for good measure, and you’ll find yourself managing more retirement accounts than you can handle.  And rebalancing your investments across multiple accounts is a real chore.

Potentially high 401(k) fees can also be a concern.  While fees for IRAs are clearly outlined, they often are difficult to assess in 401(k) plans because they are generally factored into the overall return.  Fees tend to be higher if an insurance company, rather than a mutual fund company, is administering the 401(k).  This may now change as a new law requires plan administrators to disclose all 401(k) fees. On your 2012 401(k) statements, you can expect to see these fees.

Second marriages and marital problems may be among other reasons to consider an IRA rollover.

Surviving spouses are automatically entitled to 401(k) funds if an account holder dies.  That could be a problem if you have children from a prior marriage and want them to share in your retirement savings. You can only change the 401(k) beneficiary if your spouse notarizes their consent. On the other hand, IRAs provide greater range of flexibility in terms of beneficiary designations, so you can have as many as you need.

If you decide that an IRA is a better option for your retirement savings than a 401(k). be sure to transfer the funds correctly.  Set up the IRA first and then transfer the funds directly to that account through your plan administrator.  Don’t transfer funds to a non-retirement account. You have 60 days to roll funds back into an IRA in the event of a deposit into the wrong account.  However, if you fail to do so in a timely manner, you will have to pay taxes and a penalty on the withdrawal.

Please keep in mind, that rules about IRAs or 401(k)s are constantly changing, so always be aware of latest changes to federal regulation and policies.

If you have any specific questions about your IRA or 401(k) accounts, call us at Compass Rose Financial Planning and we will work with you in helping you decide how best to transfer your retirement funds.

About compassrosefp

Certified Financial Planner, CFP, Fee-Only
This entry was posted in Advisor Insights, Estate Planning, Financial Planning, Investing, Retirement, Taxes and tagged , , , , , , , . Bookmark the permalink.