To Roll or Not to Roll Your 401k

I thought I’d tackle the granddaddy of all, the most frequently asked post-pink slip question: whether or not to roll over your 401k.

Keeping Track Becomes Difficult

My answer is usually “Probably yes, probably to an IRA, but don’t feel like you have to be in big hurry to make it happen.” The person who approached me with this question actually had old 401k’s from not 1, not 2, but 3 ex-employers. And that illustrates one of several reasons I usually say “Probably.” Frankly, this is just a lot to keep track of, plus a lot of extra paperwork, for what usually amounts to no additional benefit. To make matters worse, it’s not uncommon for employers to change 401k plans or 401k administrators to get acquired, further complicating matters.

Company 401k’s Funds Can Have High Fees

While it would seem unthinkable to forget about an account you worked so hard to build, when things get this unwieldy, it happens. Having this many accounts also makes it hard to tell if the investment mix of your overall portfolio(stocks vs. bonds vs. real estate, US vs. international, small vs. large, etc.) matches your target or not. Since asset allocation is one of the key determinants in the portfolio’s performance, this is pretty important. Tweety too Tweety too Speaking of investment choices, that’s another good reason to consider rolling your 401k over to an IRA, not your new employer’s 401k. While things are improving all the time, many 401k’s still offer limited and/or costly investment choices. Chances are that will be true of the new employer plan as well, hence my recommendation to go IRA… with a discount broker, if you want to contain costs. (Caveat! IRA’s and 401k are NOT governed by exactly the same laws, so be sure you don’t need to take advantage of a feature allowed on the old 401k but not after the money is rolled over.

An Example

As an example, if you leave a job at age 55+, you can take withdrawals from your 401k penalty-free. Not so for an IRA. There are others, many to do with early withdrawal exceptions, so it pays to research these differences!) To sum up then, yes, I usually recommend people roll over their 401k’s, but know that, unless the balance in your account is less than $5000, your employer can’t kick you out. (Find details on this here.) So if you’ve got a lot on your plate — as an outcome of your job change or for any other reason — don’t feel any extra pressure to make this happen ASAP. Just don’t let it fall so far down the To Do list that you forget you have it.

About the author

Sherrill St. Germain, CFP®

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