What Should You Do With an Old Retirement Account?

It might be time for a retirement account rollover. Let’s explore some options for consolidating your accounts.

It’s become a cliché: the image of a disorganized, confused person dumping a pile of receipts on an accountant’s desk and begging for help. Save me from the nightmare of filing my taxes! While the caricature is becoming less relevant with the rise of electronic document sharing, easily accessible statements and transaction histories, and intuitive accounting software, the spirit remains firmly intact.

For investors, it takes on a different flavor but one equally frustrating and debilitating for those affected by disorganization, lack of clarity, and a sense of hopelessness. It can be summed up in story after story we can tell of clients who have accounts spread across dozens of institutions, of lost property claims, of the life insurance policy where the company has changed hands so many times the old statement has no usable information, or of the forgotten 401(k) from four jobs ago that hasn’t been reviewed in over a decade.

That last point is where we have some deep insight as advisors to individuals and companies on their 401(k) and 403(b)s. If you find yourself in this situation and have some money in a retirement account with your former employer and are unsure what to do, we can help.

Let’s cover your options:

#1 Leave it where it is

We generally don’t recommend this. Administratively, it can become frustrating having your assets floating around old retirement plan accounts. Usernames and passwords get forgotten, or worse, your former employer experiences a transition (merger and acquisition, new service providers, etc.). Suddenly, your assets are at a new recordkeeper, and you don’t know how to access your account. Of course, they must notify you, but we all accidentally delete (or throw away) important emails and mailings, assuming it’s just another “junk” piece.

#2 Roll it into an IRA

A potential benefit of moving your assets out of your former employer’s retirement plan is that you can reinvest them in funds that may be better suited to your financial goals than the funds they were in previously. Plus, an individual retirement account (IRA) may have lower fees and more investment options than your existing retirement account.

Rolling over a 401(k) to an Individual Retirement Account (IRA) is a common practice for many people who are changing jobs or retiring. This move can help you maintain the tax-deferred status of your retirement savings and often gives you more control over your investment choices. Let’s dive into how to execute a rollover, the benefits, and some key considerations.

Why consider a 401(k) to IRA rollover?

• Broader Investment Choices: IRAs typically offer a wider range of investment options than 401(k) plans, which are often limited to a selection chosen by your employer. With an IRA, you can invest in individual stocks, bonds, mutual funds, ETFs, and more.
• Potential Lower Fees: IRAs sometimes have lower administrative fees than 401(k) plans, which might have higher expense ratios for investment choices or administrative fees.
• Consolidation of Accounts: If you have multiple 401(k) accounts from different jobs, consolidating them into a single IRA can simplify your financial management and tracking.
• Estate Planning Benefits: IRAs typically offer more flexibility than 401(k)s in terms of estate planning, such as easier setup of trusts as beneficiaries.

How to roll over a 401(k) to an IRA

• Choose the Type of IRA: Decide whether you want to roll over your 401(k) into a traditional IRA or a Roth IRA. Rolling over to a traditional IRA maintains the tax-deferred status without immediate tax consequences. A Roth IRA, on the other hand, will require you to pay taxes on the rolled-over funds now but allows tax-free withdrawals in retirement.
• Open an IRA Account: If you don’t already have one, you must open an IRA account with a financial institution. Consider the fees, investment options, and services when selecting where to open your IRA.
• Initiate the Rollover: Contact the administrator of your 401(k) plan to initiate the rollover. You can choose either a direct rollover or an indirect rollover:
  • Direct Rollover: The money is transferred directly from your 401(k) to your IRA. No taxes are withheld in a direct rollover, and this method is generally simpler and involves less risk of penalties.
  • Indirect Rollover: You receive a check for the balance of your 401(k), which you then deposit into your IRA. You must complete this transfer within 60 days to avoid taxes and penalties, and your employer will withhold 20% for taxes, which you’ll have to make up out of pocket to roll over the full amount.

Key considerations and potential downsides

• Tax Implications: If you roll over from a traditional 401(k) to a Roth IRA, be prepared to pay taxes on the rolled-over amount during that tax year. Evaluate whether it makes financial sense based on your current and expected future tax rates.
• Timing and Deadlines: For an indirect rollover, you have 60 days from the date you receive the funds to deposit them into your IRA. Failing to meet this deadline can result in a taxable distribution and potential penalties.
• Required Minimum Distributions (RMDs): If you’re over 72, consider how rolling over to an IRA will affect your RMDs, especially if you’re still working and don’t need to take RMDs from your current employer’s 401(k).
• Protection from Creditors: Depending on your state’s laws, 401(k) plans often offer better protection from creditors than IRAs, which might be a consideration if you are concerned about legal claims.

#3 Roll it into your new employer’s retirement plan

The main advantage of rolling your assets into your current employer’s retirement plan is that all your retirement dollars will be consolidated in a single account. Having all of your assets in one place simplifies things administratively and makes it easier to monitor investment performance, fees, and total asset growth.

Choose wisely and be careful! Depending on your financial situation and goals, one of these options might stand out as the winner. For those interested in exploring an indirect Roth IRA strategy, keeping retirement assets inside 401(k) or 403(b) plans is key. If you decide to roll over your assets, make sure to do a direct rollover and not a withdrawal. If you make a withdrawal and you’re younger than 59.5 years old, you will trigger a 10 percent early withdrawal penalty, as well as unnecessarily reducing your overall retirement assets. To be safe, call your recordkeeper directly and have them initiate your direct rollover over the phone.

As with all financial decisions, having a plan to frame the question is crucial. Your overall goals and objectives, as well as the specific makeup of your portfolio, should drive your decisions.

Learn more about our Personal CFO approach to wealth management.