To Rollover or Not Rollover?

To Rollover or Not Rollover?

January 02, 2024

According to the Department of Labor, employees will have, on average, 12 different jobs in their lifetime. And the average median tenure in a job is 4.3 years for men and 4.0 years for women.

Does this sound familiar? If you’ve done a lot of job-switching over the years, chances are that you’ve participated in a fair number of employer retirement plans.

Maybe you’ve never rolled over assets from former plans into your new employer’s plan or an IRA. If you did, you’re not alone. More than one in five employees has at least one “forgotten” retirement plan account.

In some cases, moving these assets may seem more trouble than it’s worth, especially if some account balances are less than the cost of a night on the town. In other cases, keeping these assets where they are might be a better idea than rolling them over. Let’s look at both sides of the equation.

Why keep my 401(k) assets where they are?

Leaving 401(k) account assets with former employers saves you from having to take any action, and you still can roll them over later. For example, after you’re retired.

Other reasons for not rolling over? You might like the investment choices in your former employers’ 401(k) plans. Or these plans may charge lower fees than your new employer’s plan or an IRA.

Your old plan recordkeepers may offer better educational resources and planning tools than a new 401(k) recordkeeper or IRA custodian can provide.

Another reason? if you need to take pre-retirement distributions you won’t have to pay an early withdrawal penalty if you remove money from a 401(k) plan after you turn 55. With an IRA, you must wait until you’re 59½ to take penalty-free distributions. (Note that even if these penalties are waived, the distributions themselves count as taxable income.)

Also, if you’re deep in debt or you’re a defendant in a civil lawsuit, 401(k) accounts generally offer better protection of your assets from creditors and legal judgments than IRAs.

Why roll over assets into a new 401(k) plan or IRA?

There are several reasons you might want to consider moving assets from other plans into your new employer’s 401(k) plan or rolling them over into an IRA.

Simplicity and streamlining

One major benefit of consolidating your retirement accounts into one account is that there’s less information to track. You’ll receive one statement, have only one retirement account to manage and be able to see your overall financial picture more clearly.

A single view of your asset allocation

When you have multiple retirement savings accounts, you might assume your investments are sufficiently diversified, but this may not be true. Consolidating all of your accounts makes it easier for you to allocate your retirement portfolio among stocks, bonds and cash and rebalance when necessary.

Possibly lower fees

401(k) plans incur various fees, including administrative, management, investment, and service charges. By combining accounts, you may pay fewer fees.

IRAs custodians charge fees as well, but if you consolidate all of your 401(k) assets into a single IRA, your higher total account balance may enable you to reduce or avoid fees altogether.

More investment options

Your new 401(k) plan may offer a broader variety of investment options than your former plans. And if you roll over into a brokerage IRA, you’ll be able to purchase stocks, bonds, ETFs and have access to a much broader range of mutual funds than 401(k) plans typically offer.

Easier tracking of Required Minimum Distributions

Starting at age 73, you’ll need to make required minimum distributions (RMDs) from your retirement accounts each year.

If you have more than one 401(k) account, you'll have to calculate annual RMDs for each account and take the distribution by the end of the year. If you underestimate an RMD or miss the deadline, you may have to pay steep tax penalties.

Consolidating all of your retirement assets into a single 401(k) or IRA account makes it easier to calculate and take annual RMDs.

Roll over before a former plan sponsor does it for you

Most employers would prefer to terminate accounts of former employees. But they generally can’t do so if your account balance is $7,000 or more. But if an account balance falls below the $7,000 threshold, they can legally kick you out of the plan without your consent.  

If the balance is between $1,000 to $7,000, they can roll the money over into an IRA under your name. The choice of IRA custodian is theirs, not yours, and it might not be one you would have chosen on your own.

Avoid the “cash out” scenario

If your account is worth less than $1,000, your ex-employer can simply close your account and mail you a check for the balance.

This is the most undesirable scenario, because taxes may be withheld on that withdrawal.

If they’re not, you may end up having to pay taxes and early withdrawal penalties anyway because this cash-out is treated as a retirement distribution. To avoid or recoup taxes, you’ll need to transfer that amount to your new employer’s retirement plan or into a Traditional IRA, generally within 60 days of receiving the payout.

If taxes were withheld on the initial distribution, you may be able to request a tax credit for this amount when you file your tax return.

If you do decide to roll over assets between 401(k) plans or from a 401(k) plan to an IRA, you’ll want to contact your former employer’s benefits plan administrator to request a trustee-to-trustee transfer of these assets. If you own company stock in your 401(k) plan, transferring that stock to an IRA might have negative tax implications.

Before you make any rollover-related decision, you may want to meet a tax professional and a financial advisor to discuss your options.

 

 


Joelle Spear is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or jspear@canbyfinancial.com

 

 

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