16 July 2020

Roll over 401(k) or Not?

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When you leave your job for whatever reason, you have four choices. You can leave the money in your former employer's plan, roll it into the plan at your new job, roll it over into an IRA at a mutual fund company or financial adviser, or simply withdraw the cash. Taking the cash is a huge mistake, because you'll pay a 10 percent penalty if you're under age 59 1/2, along with ordinary income taxes -- and you'll lose all the future tax-deferred growth on your money. The other three choices depend on some variables. Here's what to consider:

Investment choices. Typically a 401(k) plan is composed of mutual funds that are designed to grow employee's retirement assets over the long run. But once you're retired, you might want a broader choice of investments, including more conservative choices than are in your company plan. Contact a mutual fund company such as Fidelity, Vanguard or T. Rowe Price and ask to speak to an adviser about a potential rollover of your IRA. They will outline their suggested funds for your situation.

Investment costs. Some large company plans may be able to negotiate very low fees for their retirement plans. That may be one reason to stick with the company plan. To compare alternatives, ask the company plan sponsor about the "overall fees" your account pays each year. Then, when talking to a financial planner or mutual fund company about a rollover, be sure to ask about their fund fees, as well as any "annual IRA account maintenance fee" that would be charged to your account. Every little bit adds up -- or subtracts from your retirement assets.

Investment advice. Many company plans are set up to offer broad advice to employees about diversification of assets. Usually this is done through a fiduciary such as Financial Engines or Morningstar. However, once you are retired you may not have access to this advice. Or the advisers may specialize in the accumulation phase instead of the distribution phase.

Accounting and paperwork. As you reach age 70 1/2, when you'll face required minimum distributions from your retirement assets, a corporate 401(k) may not be nearly as helpful as a mutual fund company, which has the processes in place to automatically calculate -- and remind you about -- RMDs. A reminder: You don't have to keep all your investments at one custodian. And you can withdraw from one, or multiple, accounts as long as you withdraw the correct amount.

Special plan investments. Before you decide to roll your company retirement plan into an IRA, be aware that you may not be able to easily replace some investments specific to your plan. The company plan sponsor may offer higher yielding GICs (guaranteed investment contracts from an insurance company). Those aren't available outside your plan. And you may want to make special arrangements if you have long-held company stock as part of your retirement assets. Consult your tax adviser.

Whatever you decide, make time to think about and research your decision. Do not take a check from your company plan while you're doing this homework. Instead, wait until you make a decision, and then do a direct rollover to a new plan or IRA. The new custodian will handle all the paperwork, freeing you from potential tax liability. Your 401(k) plan is worth a lot now, and if you make the right decisions it could be worth a lot more in the future. So it's worth taking the time to deal with it correctly. And that's The Savage Truth.

Click here to access the full article on Chicago Tribune.

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