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Today’s tip will cover “Should I rollover my 401(k) or leave it?

When you leave a job for another company or when you transition into retirement, you have several options to consider for your 401k.  You might be able to leave your account where it is.  It can also be rolled over into a Traditional IRA or Roth IRA, rolled over to your new employer’s 401K if the plan accepts rollovers or distributed as a lump sum cash payment but be aware of the tax consequences. 

Today we are going to review just a few of your options.  

One: Leave your old 401K with your former Employer.  An old 401k can be left with the original plan sponsor if your account balance is over their account balance minimum which can be $5000 or more depending on the company. If it is under $1000 the company may issue you a check.

A few reasons why someone would consider leaving it with their old employer are: 

  1. Institutional Pricing rates for mutual funds could be lower.  
  2. Legal Protection – If you are concerned about creditors, collections, or judgments, keeping your 401K in place can provide you with more safety.  
  3. Early Retirement Benefits- The IRS Rule of 55 allows an employee who is laid off, fired or who quits a job between ages 55 and 59 ½ to pull money out of their 401K or 403b plan without penalty.  However, if you have money in a former 401k or 403b it is not eligible for early withdrawal exemption.  

Two: Roll over your old 401K to a Tradition IRA or Roth IRA.  You can open an account on your own through a financial institution. 

Here are few reason to consider rolling over your old 401K to a Traditional IRA or Roth IRA.

  1. More investment options. One of the biggest benefits of rolling your old 401k into an IRA or Roth IRA is the ability to pick your investment options.  You have access to all different types of investments and are not limited to what is available only in the company selection.  ETFs know as Exchange Traded Funds, Private portfolios of individual stocks or bonds, and wide range of mutual fund selection.
  2. Roth Option – If you think you will be in a higher tax bracket or if you think tax rates will increase during retirement, then an IRA rollover to a Roth IRA might be a good option for you.  Remember, you will need to pay the taxes if you are moving your old 401k to Roth IRA or if you have a Roth 401K, a Roth IRA is preferred rollover option.  
  3. Fees and Costs- This would be a great time to review and compare your total fees and expenses for your old 401K plan verse controlling how you will invest and what you will pay.  

As you can see, rolling over a 401(k) may be the best option for you in most cases, but there are reasons why leaving the money in the company fund could work better.  For your specific tax related questions consult with your tax advisor.

If you’re struggling with not knowing what to do or where to start when it comes to managing your finances and investing.  I have a great video that will help you accomplish more with your money, without giving up latte’s or any of that nonsense. You can get the video at savvyupnow.com/money101.

Catherine Magaña is a CFP® or CERTIFIED FINANCIAL PLANNER™ professional and Managing Partner at Savvy Women Wealth Management in Carlsbad California.

O: 760-692-5700