The money in your 401(k), that is.
But just because you can doesn’t necessarily mean you should. There is something to be said for leaving it in your old 401(k) when you change jobs.
Of course, your former employer won’t continue matching your contributions. But you can tap into a 401(k) four and a half years earlier than you can an IRA. You can delay receiving distributions until you actually retire. And your 401(k) is protected against claims from creditors in case you file for bankruptcy.
That said, we believe that in most cases, the reasons for rolling over your 401(k) outweigh those for keeping it at your old company.
Why roll over?
For one thing, it is generally a good idea to consolidate your accounts. Most people change jobs multiple times throughout their lives. If you’ve got three or four different 401(k)’s at old employers, they can get pretty hard to keep track of. Remember, when you leave the plan behind, you’re also leaving your plan provider. So you aren’t likely to be informed of changes in fees or investment options. Your old employer might lose track of your contact information, or you might lose theirs, and this could mean trouble when you finally want to track down your account.
For another thing, consolidating accounts can often lower your costs, or simply allow you to access investments with higher minimums. Many institutions lower their management fee when household assets reach a certain level. And clients with higher account balances often get their administrative fees waived or a variety of other perks.
Even more compelling is the fact that, with most 401(k)’s, your investment choices are limited to those in the company’s plan. All companies purposely limit the available investments in order to keep the plan simple enough for all employees to understand. It is possible that the 20 to 25 funds in your Retirement Plan are all very good. But often, they aren’t the best. Sometimes, they’re downright awful.
What about fees?
This can be a mixed bag, depending on your particular plan. 401(k)’s are not free to administer. Sometimes employers will pick up a portion of the cost, sometimes the entire cost is distributed among the participants. If your former employer was a small company, chances are that your plan was quite expensive. There are fewer assets in the plan, and fewer participants to spread the cost around. If your former employer was a very large company with billions of dollars in the 401(k) plan, the opposite is probably true. Either way, this is something that you have no control over, unlike in an IRA where you get decide who manages it, what investments are used, and ultimately what fees are paid.
Bottom line: In most cases, it pays to rollover that 401(k). But there are a few rules for doing that successfully.
The first rule is don’t take the money as cash. You’ll be hit with harsh taxes and penalties for early distribution. And suddenly having a pile of money just might tempt you to buy that new car or a 60-inch TV.
What you want is a direct rollover – not a check made out to you. This kind of rollover comes in three flavors.
- Roll your old 401(k) into a 401(k) with your new employer. This may make sense if your new job offers low-cost investments but you’ll most likely be limited on investment options.
- Roll your 401(k) into a Roth IRA. You’ll pay taxes on the amount you roll over but your investment earnings will grow tax-free. And there’s no income tax on your future IRA withdrawals. Tread very carefully here. If your account is large, or your income is high, you could end up paying more in taxes than you need to. There are instances where this type of rollover can make sense, but do not attempt it without the proper guidance.
- Roll your 401(k) into traditional IRA. This is the option that makes the most sense for most people. It allows you to continue to defer taxes on your money and may open up more investment options – possibly with lower fees.
But those investment options we just mentioned. How do you pick the right ones?
Good question.
Some people are perfectly comfortable making their own investments. They consider themselves market savvy and don’t mind taking the time to research the best stocks, bonds, ETFs or mutual funds for their IRA.
If you put yourself in this category, consider this. You’re taking a new job. Do you really want to spend time doing all this? Won’t you have enough on your plate?
That’s why this just might be one of those times when you’d be better off with some outside help. Which is where we come in.
The BGA Factor
We’re Benedetti, Gucer and Associates. Or BGA for short. Headquartered in Atlanta, Georgia, we’ve helped hundreds of people turn their old 401(k)s into investments designed to give them the means and the freedom to live meaningful and rewarding lives. And we can do the same for you.
We’ll start by explaining all your options in detail. We’ll make sure you avoid all the pitfalls. We’ll alert you to any tax management opportunities that may be available. And we won’t nickel and dime you for doing all that.
Better still, we’ll open up a world of investment opportunities that simply aren’t part of most 401(k)’s. The investment universe is quite large…stocks, bonds, ETF’s, mutual funds – even alternative investments. And we’ll help you sort through all of these options and make choices that are right for you.
Your best interest. Not ours
Even more important, we’ll make absolutely sure that whatever we recommend is in your best interest. We are a Registered Investment Advisor and we have a fiduciary responsibility to always do that.
And even if we weren’t legally obligated to act in your best interest, we’d do it anyway.
Because at BGA, that’s how we roll.