Left your employer without taking your 401K?
A friend e-mailed me last week asking about her 401k options. She left her former employer, but also left her 401k plan with them. She was wondering if she should roll the old account over into an account with her new employer.
I let her know that while that is definitely an option, she may be wiser to move the money into a seperate IRA account. When done correctly, an “IRA rollover” has no penalities and no tax implications. In addition to the tax benefits, I have a three reasons why I prefer this option over moving to the new employer.
1. 401k plans are limited
Most 401k plans offer an average of 25 investment choices. This is true of my employer’s plan. Whether you are an active or passive investor, only 25 options can limit your diversification. Plus its difficult to know why these investments have been chosen for your firm’s employees. I’m not sure if my employer examined expense ratios when deciding on the funds to offer me or if they just picked the recommended options suggested by the brokerage firm.
In an IRA plan you have almost unlimited options. I like to choose individuals stocks, ETFs, and mutual funds to create my own diverse account. I am an active investor and enjoy the control I can excerise over the account. I initially started as a passive investor, choosing a couple of mutual funds and just leaving the investment alone. I like that the IRA plan gives me both options.
2. All my money can be together
Its very normal to change jobs every couple of years nowadays. For friends that plan on taking that route, I tell them to open a 401K at each new employer, but instead of rolling it along from one employer’s plan to another, I advise putting the funds from a past emplyer into one IRA account. This way, all funds from old employers will be in one place.
I view this as a better method to capturing long term returns because the money will only be cashed out from the 401k plan once or not at all. The 401K to IRA option allows for a whole investment portfolio to be moved without cashing out. When jumping from one 401k plan to another, the money must be cashed out everytime because its likely the new employer has a different set of investment options. This can have a large impact on gains/losses.
3. Roth funds can remain Roth funds
My employer offers a Roth 401K account in addition to a traditional 401K. I would hate to see anyone who took advantage of the Roth 401k move to an employer that doesn’t offer one and have to lose out on the tax benefit of that decision by converting funds to a traditional 401K. The great thing about IRAs, is that Roth 401K funds can be moved to a Roth IRA without losing the tax benefit (same goes for traditional).
What’s even better is that there is no limitation preventing me from having both a Roth IRA and a Traditional IRA (I have both). So according to whatever type of 401K plan I had at a previous employer, I can just deposit the funds into the corresponding IRA plan.
I hope this post will aid my friend in her decision making process. As for the logistics of the rollover, any full service or discount broker will be happy to help. They are usually so excited you want to move your money, so they try to make the process as painless as possible. Also, the IRS has a rollover chart on their website as a guide (though I find it a bit confusing). If anyone has any follow up questions, I’m here to help.
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February 18th, 2010 at 10:13 am
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