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Should you Rollover your 401(k)?

Updated: Oct 5, 2022




Don't let your hard-earned retirement savings be part of the trillions of dollars lost! Luckily, you have a number of options to recover your money from your old 401(k) or 403(b) Plans.


To note: we will be using "401(k)" synonymously for all rollover-eligible retirement plan types (401(k), 403(b), 457(b), SIMPLE IRA, SEP Plans, etc.).


First, you have to find your old 401(k). Any old 401(k) statements you have should contain the plan administrator’s contact information. If that contact information is out of date or you do not have any old 401(k) statements, try contacting each of your previous employers and asking if you still have a leftover 401(k) plan with their company.


If the company no longer exists, try these four resources to find your lost money:


After you have found your old 401(k), you have five options:

  1. Keep your 401(k) with your former employer

  2. Cash out your 401(k)

  3. Rollover your 401(k) to an IRA by yourself

  4. Rollover your 401(k) to an IRA with an advisor

  5. Move your 401(k) to your new employer


Find out which option is best for you:

1. Keep your 401(k) with your former employer

In some cases this may be your best option, but in general, we preach less-is-more. We rarely recommend keeping your old 401(k) with your former employer; rolling the funds over a Rollover IRA or to your new employer's 401(k) is often better.


Consolidating your accounts reduces complexity. Having to keep track of your old 401(k) with your former employer can lead to headaches down the road and the possibility of your money joining the 20% of all 401(k) funds lost and forgotten.


Pros:

- No action needs to be taken

- Your investments and fees will remain the same

- Depending on your plan, you may be able to take a loan from your 401(k)

- If you retire between age 55 and 59.5, withdrawals are penalty-free from a 401(k) - 401(k)s have additional protections from creditors over IRAs in case of bankruptcy - Avoid the pro-rata rule for Backdoor Roth IRA strategies


Cons:

- You have an additional account to keep track of and could one day lose or forget it

- You are stuck with the few investment options offered in your current plan

- A Rollover IRA or your new 401(k) may charge lower fees


2. Cash out your 401(k)

We nearly never recommend cashing out your 401(k).


The funds you cash out will be subject to your full ordinary income tax at your current tax rate (if it is not Roth money) and you will pay an additional 10% penalty for early withdrawal (unless you are age 59.5+ or 55+ and retired).


Pros:

- It is the easiest option

- You get your cash upfront

- Fewer accounts to deal with in the future

- The tax and penalties are negligible if the account is very small (<$1,000)


Cons:

- Funds are subject to your full ordinary income tax at your current tax rate

- Additional 10% penalty for early withdrawal (unless you meet the age requirements)

- Fewer tax-advantaged assets and withdrawn funds would no longer be tax-deferred


3. Rollover your 401(k) to an IRA by yourself

Rolling over your 401(k) to an IRA is a great option whether you work with an advisor or do it yourself. Consolidating your accounts will help you avoid losing track of your old 401(k) plans. IRAs can also offer you lower fees and more investment choices, which can lead to better investment performance.


However, consult with a qualified financial advisor before attempting to rollover an old 401(k) by yourself due to the numerous pitfalls and mistakes than can be made.(Specifically, beware of indirect rollovers; they can be subject to full taxation plus a 10% penalty if you miss the 60-day deadline and an unnecessary 20% withholding of your funds that you can avoid with direct rollovers).


Pros:

- Consolidate accounts

- Offers the most control and most choice

- Many low- or no-cost IRA options to choose from - IRAs offer a much wider array of investment options than 401(k) plans

- Self-directed IRAs can be opened for even wider investment options

- Additional tax-savings strategies like Roth Conversions are available


Cons:

- The rollover process can be complicated and frustrating

- Costly mistakes are possible without professional guidance

- You cannot take a loan from your Rollover IRA

- Your old 401(k) or new 401(k) may charge lower fees

- Not reversible; you cannot convert an IRA to a 401(k)

- You must wait until age 59.5 to withdraw penalty-free

- Backdoor Roth IRA strategies may become subject to the pro-rata rule

4. Rollover your 401(k) to an IRA with an advisor

Rolling over your 401(k) to an IRA is a great option whether you work with an advisor or do it yourself. Consolidating your accounts will help you avoid losing track of your old 401(k) plans. IRAs can also offer you lower fees and more investment choices, which can lead to better investment performance.


Working with a financial professional involves additional cost but they can provide you with valuable guidance, help you navigate the complex rollover process, and avoid mistakes. Professional management may or may not lead to better performance.


Pros:

- Consolidate accounts

- Offers the most control and most choice

- Professional management may lead to better performance

- Guidance from a professional advisor can simplify rollovers and avoid mistakes

- IRAs offer a much wider array of investment options than 401(k) plans

- Self-directed IRAs can be opened for even wider investment options

- Additional tax-savings strategies like Roth Conversions are available

Cons:

- You cannot take a loan from your Rollover IRA

- Not reversible; you cannot convert an IRA to a 401(k)

- You must wait until age 59.5 to withdraw penalty-free

- Financial advisors charge fees for professional management

- Your old 401(k) or new 401(k) may charge lower fees than working with an advisor - Backdoor Roth IRA strategies may become subject to the pro-rata rule


5. Move your 401(k) to your new employer

If you do not want to open a Rollover IRA or work with an advisor but still want to consolidate accounts, moving your 401(k) to your new employer can be a solid option.


Pros:

- Consolidate accounts

- Similar investments and fees will be offered

- Depending on your plan, you may be able to take a loan from your 401(k) - If you retire between age 55 and 59.5, withdrawals are penalty-free from a 401(k)

- 401(k)s have additional protections from creditors over IRAs in case of bankruptcy

- Avoid the pro-rata rule for Backdoor Roth IRA strategies


Cons:

- The rollover process can be complicated and frustrating - A Rollover IRA or your old 401(k) may charge lower fees

- You are stuck with few investment options offered in your new plan


If you are interested in a free consultation to determine which option is best for you, schedule a meeting with one of our financial professionals by clicking here.



 

DISCLOSURE: Silverstone Financial LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Please see our disclosures page for additional information.

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