401K Rollover Options
Our topic today is 401K rollover options. Recently, I’ve had quite a few people ask me, “How can I roll my 401K?” “Should I roll my 401K?” “When can I do it?” When talking about 401k rollovers, I can’t help but think of a song… Five bears in the bed and the little one said
“I’m crowded, roll over” So they all rolled over, and one fell out.
Now you might think what a silly song, but the more I think about it, it does apply. Sometimes you leave a job and leave your 401k, and then you might work at another job and leave it and before long you have all these 401ks sitting all over the place, your investment portfolio is crowded. It’s hard to be coordinated and it’s very easy for something to fall off the bed! Whether it’s just not coordinated with the rest of it your accounts or you forget you even have it! That’s probably not the best planning! But you also don’t want to roll over and lose anything. So should you roll a 401k or not?
There are really three events when you can roll your 401K.
The first is if you’re switching jobs. If you are moving to a different company and there is a new 401K opportunity, you will then have the ability to roll over.
The second time you’d have this come up is at retirement. This is where rollovers are talked about the most because then it becomes an important part of your retirement plan.
The third time, you can roll over your 401K is actually less known, but very powerful, and that’s after you turn 59 1/2.
Most companies allow you to take a 401K rollover after 59 1/2. even if you’re still working for them. As we go through this, you’ll find some of the reasons why we might want to take advantage of that, but very few people know that it’s even an option.
Regardless of which event causes you to have questions about 401K rollovers, I really want to walk through the options with you to help you make a decision.
Benjamin Franklin always said that when he was making a decision, he would draw a line down the middle of the paper and put both options on each side, or in this case three options. Benjamin Franklin is a pretty smart guy, so let’s kind of use that same strategy as we go through the options with 401K rollovers and pros and cons.
401k Rollovers Things To Consider – Costs, Convenience, and Investment Choices
So there are really three options we’re going to talk about. One is leaving it where it’s at. Two is if you’re switching jobs then it’s moving it to your new plan. and three is rolling it out into your own IRA.
Let’s go through the pros and the cons of each, which consists of three main areas. These are cost, convenience, and investment choices.
With cost, we are going to look at what fees would be associated with these options. When considering convenience we want to know how convenient it is to do it now, but we also need to look into the future and see if it will be convenient for us to access the funds later if we need them. Then we want to look at our investment choices. We want to see how it is being managed and what our choices are.
So if we look at leaving the 401K where it currently is, let’s now consider the convenience, cost, and investment choices.
It is convenient to leave it where it is because that means that you have nothing else to do now. But with any 401K, whenever you want to access those funds, you do have to go through the plan sponsor, the employer to access them. So, depending on how their process works, it could be inconvenient to take withdrawals or access your account in the future.
Looking at our second option, which is a rollover, it could be an inconvenience at the present time, but maybe more convenient in the future to access loans on it or to have your accounts consolidated.
A law was passed a few years ago regarding fee transparency, but even as an advisor, I have a hard time digging through and finding the exact costs associated with 401ks. There are multiple “people” that have to be paid; you have the record keeper, you have a third-party administrator, you have the custodian, you have the fund managers, and often you have an advisor.
I believe if you really want “Full Disclosure” put it on one page and make it an easy thing to read, right? But that’s not the case. Most 401K’s, if we dig into it, the fees are usually going to be around 1.5%-2% or sometimes even higher. This is true for either leaving it where it’s at or moving to your new company plan.
Next is it becomes your investment choices. In any 401K, you have only the choices that are in the plan. You have whatever options they picked, those are your choices. Whether you leave it in your old plan, or even if you’re moving it to a new plan, you have limited investment choices.
Whether leaving where it is at or moving it to a new 401K may mean it’s a convenient thing to do now, but again, you might have some inconvenience on the back end. Your cost is going to be about the same with each most often and you’re limited to the choices of the 401k.
Now let’s look at our third option, rolling to an IRA. If we roll it to an individual IRA, it is an additional step you have to take now but you now have convenience going forward. If you need the money, it is easy to get out and you won’t need to go through the hoops that your previous employer had set up.
As far as cost, if you move it to your own IRA this is something you have to look at and compare with all the different choices, which leads to the next point to consider, investment choices. When you move it to your own IRA you have all the different investment options available to you. You’re not stuck with just what’s in the plan.
You can have yellow money, red money, green money. Anything is available and it can be more coordinated to what you’re really looking for. I think this is especially key when you’re at that 59 1/2 or you’re entering retirement. You want to make sure that your 401K is providing you the retirement income or the retirement security you want and having all of those choices is important.
But even if it’s years away and you’re just going to let it grow there’s something about the choice, and having someone be able to professionally manage it for you instead of being confined to the mutual fund choices in a 401k plan. (check out our blog on the secrets of mutual funds!)
Should I Rollover My 401K?
When it comes to all three, moving it to your own IRA ends up being more convenient for you in the long run. You’re going to want to compare costs but also consider the value you are receiving for the cost/fees you are paying. If you’re paying a fee, is it worth it?
Then it’s the investment choices. Do you want to be stuck with just the choices in the plan, or do you want help from an advisor to help with that being managed to reach your goals?
Hope this helps, but of course, there’s a lot to go through so if you want to just bounce questions off of us or walk through all the pros and cons of all the options available to you, please schedule a call.
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