A 401K rollover is one of the best ways to prepare for your financial future but when is a 401K rollover not a good idea?

When you leave an employer after contributing to the sponsored 401K plan, you generally have one of three options. You can leave the investments with the old “orphaned” 401K plan, you can roll your 401K assets into a new plan at a new employer or you can do a 401K rollover into an individual retirement account (IRA) which you control.

The most popular, and often the best option is to roll the 401K investments into an IRA account. This keeps your retirement savings in one place and gives you the greatest control over your financial future.

But it turns out there are a few instances when a 401K rollover is not the best option for your money. Managing your money to meet your retirement goals shouldn’t be complicated but government rules on investing and legal protection have made it so. Make sure you’re not in one of these three circumstances before you start the 401K rollover process.

When a 401K Rollover Might Not be Such a Great Idea

A Stable Value Fund is a fund option in 401K plans that provides principal protection and a return slightly higher than money market investments. The fund is generally called something like a ‘capital preservation’ or ‘fixed-interest’ fund and the group has returned an average 2.7% annually over the last five years. The funds are highly regulated by the government to provide the promised layers of protection and may be backed by an annuity contract.

The specific Stable Value Fund in which you invest may not be available in another 401K plan or you may have to create a similar fund out of investments that can mimic the return in your IRA. This reason for maintaining your old 401K plan is the weakest of the three because there are other options available. Transferring your investments into an IRA, you can ask the transfer representative which options might be available to reproduce the safety and return of a stable value fund.

A more serious issue in 401K rollovers is that of company stock. If you’ve invested heavily in the company stock and it’s appreciated, you might be facing a hefty tax bill depending on your rollover option.

• Company stock transferred to an IRA will have the entire amount taxed as income when you withdraw the money. This could increase your income taxes in retirement and lead to a higher tax bill compared to capital gains taxes.
• The alternative option for company stock is to roll it into a non-retirement account, paying income taxes on the amount you paid for the stock. You’ll pay capital gains taxes on the remaining amount when you sell the shares which may be a lower rate than your income tax bracket.

Federal law has jurisdiction over 401K assets and protects them from your creditors and personal law suits. IRAs fall under state law and you may not get the same protection. Make sure you check the laws in your state and whether your IRA assets are protected from creditors or other personal claims.

When is a 401K Rollover a Good Idea?

Despite the three instances where you’ll want to rethink a 401K rollover, the process really is the preferred choice in the majority of cases. Your investment options in a 401K plan are extremely limited, normally to the funds that offer your employer the largest kickback and the highest commission to the plan advisor. You’ll have more investment options in an IRA because you control the assets. Besides traditional stocks and bonds, you’ll be able to diversify your retirement assets in real investments like precious metals and even business startups.

While federal law may protect your 401K assets from creditors, it doesn’t protect them against the federal government or your old employer. Corporate malfeasance is on the rise and retirement plans are being raided or sent off to the government’s Pension Benefit Guaranty Corporation, which doesn’t have enough money to really guarantee pensions. An IRA puts you in control of your investments and relieves the risk of someone using your money for their own gain.

You work hard and shouldn’t have to work even harder to determine the best solution for your retirement assets. When you are ready to have more control over your retirement investments, consider the 401K rollover process and the advantages of an IRA. Contact us learn more about opening an IRA. This will give you the opportunity to choose the type of investments and really diversify your portfolio.