401k Rollover | Do You Really Need To Rollover?

Stop! You Don’t Really Have to Rollover That 401(k)

You’re going to retire in six weeks, so you have no choice but to rollover your 401(k) balance to an IRA, isn’t that right? Actually, no, it isn’t.

As more and more Baby Boomers reach retirement age, they are led to believe that when they retire they must take their hard-earned 401(k) savings and roll the money over to an Individual Retirement Account (IRA). A multitude of brokers and advisors have built their businesses on chasing retirees and convincing them to do just that.

In fact, a rollover can be a good idea—sometimes. But it is not your only choice. You should know, for one thing, that if your account balance is in excess of $5,000, you cannot be forced out of most employer-sponsored 401(k) plans. If a financial professional conceals that information from you, find another!

As with so many things in life, there is no one answer that fits all situations. People considering retirement should carefully weigh all of their options. Pre-retirees regularly review the various options available to them with Trust Point professionals.

When you might want to keep your money in the 401(k) plan

In some cases, there are advantages to keeping your balance in a 401(k) plan after you retire. Here are some examples.

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If you retire early and are between ages 55 and 59 ½.

Ordinarily, if a 401(k) plan participant or IRA holder takes an early distribution, before age 59 ½, not only is this subject to federal and state income tax, it is more than likely subject to a federal and state excise penalty. However, if you have assets in a 401(k), terminate your employment in the year you turn 55 or later, and leave your money in the qualified plan, you can take distributions prior to age 59 ½ free of the excise penalty tax. In contrast, if you roll your money to an IRA you must wait until the age of 59 ½ to avoid the excise penalties.  Trust Point has a number of tax and retirement planning specialists that can fully explain the taxation and penalties associated with various distribution strategies.

If you plan to work past age 70 ½ and want to avoid Required Minimum Distributions.

IRA holders must begin to take Required Minimum Distributions (RMDs) the year in which they turn 70 ½.  Assets in a 401(k) plan are treated a bit differently. Although they also are subject to RMDs, a 401(k) account holder has the ability to waive RMDs if the holder continues working past age 70 ½ and is not a 5% or more owner of the company sponsoring the 401(k) plan.

If your 401(k) plan enjoys an investing economy of scale.

While no two 401(k) plans are alike, many plan sponsors provide their participants with a very competitive investment opportunity. By continuing to pool your assets with other plan participants, instead of going at it alone with money rolled into an IRA, you may benefit from mutual-fund share classes that would not otherwise be available to you as an individual investor. Also, even if your plan doesn’t qualify for institutional shares, you should be able to avoid paying any front-end or deferred sales charges on your investments. Trust Point only uses no-load institutional share class mutual funds in its 401(k) plans.

If your employer picks up some or all of the plan fees.

While it is not required, many employers opt to offset plan expenses by paying some or all fees for their employees.

When you might want to roll over your funds into an IRA upon retirement

If your former employer views its 401(k) plan as a necessary evil.

Sponsoring a 401(k) plan is a serious matter. There are specific rules and regulations to follow. If you worry that your former employer is not operating or paying attention to the plan with an appropriate level of care, it is probably a good choice to roll your money to an IRA. Some infractions could cause a plan to become “disqualified.”  When a plan is disqualified, all participants are subject to immediate distribution of their balance—and also to federal and state income taxes plus any applicable federal and state excise penalties.

If your 401(k) investment options are expensive.

Many plan sponsors take their fiduciary responsibility seriously and have created very competitive retirement plans. There are other plans, however, with a limited menu of expensive, proprietary investment options. Make sure you understand all of the fees and expenses associated with your 401(k) plan and its underlying investments before deciding whether to keep your money in it.

If you want an investment option or strategy that is not available in your 401(k) plan.

Suppose, for instance, that your plan, like many, has a menu of fixed-income investment options, but will not allow a participant to buy and hold an individual bond. Some retirees want to build an individual bond portfolio with some or all of their retirement assets. This is best done outside the plan with an advisor who specializes in fixed-income investing, specifically individual bonds. Trust Point can assist you in investigating alternative investment strategies to confirm they are truly in your best interest and will have the impact you desire.

If you want to consolidate your assets.

If, throughout your working career, you have established a number of rollover IRAs and have balances in multiple 401(k) plans, you may want to consolidate. This will allow you to ensure that your investments align with your objectives and that the proper distributions are made when you reach RMD age. Don’t forget that if you miss an RMD, there is a 50% tax penalty on the missed payment amount.  Consolidating your funds could also simplify matters for your heirs by leaving fewer accounts and distribution methodologies for them to manage. 

If you want to leave Roth savings as a legacy gift.

If you plan to leave tax-free retirement savings to your heirs, it would be best to roll your Roth 401(k) balances to a Roth IRA at retirement, then designate the heirs as your primary beneficiaries. Here is why: Roth IRAs are not subject to the RMD rules during the owner’s lifetime, but Roth 401(k) balances are subject to those rules. With a Roth IRA, therefore, you are not required to take withdrawals during your lifetime that will reduce the amount of money you leave to your beneficiaries. Upon your death, the beneficiaries will have an Inherited Roth IRA, which will continue to grow tax-free. Note, however, that the recipient of an inherited Roth IRA must begin to take RMDs the year following the inheritance, regardless of the recipient’s age. The amount of the first annual RMD (and those that follow) is based on the recipient’s age.

The decision to maintain your retirement savings in a 401(k) plan or roll it over to an IRA after retirement should be made only after you review the alternatives and develop a comprehensive plan based on the pros and cons for your specific situation. Remember, it doesn’t have to be an all-or-nothing decision. Many plans allow for partial distributions. You may choose to rollover a portion of your account and maintain the rest of the balance in the 401(k) plan. Pre-retirees regularly review the various options available to them with Trust Point professionals.

In any case, don’t let anyone pressure you to move your 401(k) assets out of the plan as soon as you retire. Take the time to decide what option will be best for you. 

Access a quick guide to your rollover options here.

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