When not to Rollover Your 401k Plan

By Harper Willis

When you retire, you’ll mostly likely face the question of what to do with the funds in your 401(k). You could cash out the plan (almost never a good idea) or roll the funds into some type of IRA.

Then again, if you are satisfied with your current 401(k)’s investment options and performance, you may be better off leaving your plan where it is.

For starters, check with your employer to make sure they allow you to leave your 401(k) money where it is. If your vested account balance is $5,000 or less, you may be forced to change accounts or cash out. And if you’ve taken out a loan from the account and still haven’t paid yourself back, you won’t be able to move the funds until the loan is paid off.

If you do have the luxury of leaving the money where it is, here are a few things you’ll want to consider before you decide whether to do that.

Do you need more investment options?
IRAs typically offer a wider array of investment options than 401(k)s. Retirees who don’t want to choosing between a variety of complex investment options—like whether to invest in a low cost index fund or an exchange traded funds—may prefer the simplicity of a 401(k) plan.

Do you hold a significant amount of company stock?
In that case, consult an advisor before you move the money out of your 401(k) plan. Some 401(k) account holders who take lump-sum distributions of employer stock qualify for a significant tax break—but once you move the money to an IRA the opportunity is gone.

Unfortunately, you have to distribute your entire 401(k) balance to get the break. Typically, you’d pay income tax rates (up to 35%) on the distribution. But when you take a lump sum distribution of employer stock, you only pay income tax on the amount the plan paid for the stock. Gains on the stock aren’t taxed until you sell the shares—and even then, you only pay the capital gains rate, which peaks at 15%.

Which plan will cost you less?
If the investments in your 401(k) plan carry high fees you can save some money by shifting to an IRA where you get to choose from a wide array of investments including some that have very low fees.

Are you finished saving?
While you may be able to leave your money with your old employer you won’t be able to make any new contributions, so you may need open an IRA if you plan to continue saving during the early years of retirement—perhaps because you hold part-time work or your total income exceeds your expenses during those years.