Should I Rollover My Old Company Retirement Plan?

By John Chorne, CFP®

We are often asked by people we meet what they should do with retirement accounts from previous employers or current employer plans that have been terminated and can be moved.   These types of accounts include 401(k)s, 403(b)s, 457 plans, SIMPLE IRAs and SEP IRAs.  Some of these plans have different rules for rolling over when leaving an employer.   In this article, we will cover the options and strategies to consider when addressing what to do with an old employer retirement account.

There are 4 different options to consider in most cases.  Here are those options and the pros and cons of each:

Leave It in the Old Plan

Reasons to leave your money in the old plan:

1. The old plan has investment options that you like and may not be available to you elsewhere if you leave the plan.
2. The old plan has low fees, including low-cost investment options.
3. The account will continue to grow tax-deferred and no taxes will be due until withdrawals are taken.  These benefits would also apply if you moved the funds to your new employer plan or an IRA for “like-to-like” money (i.e. move pretax money to a new pretax 401k or traditional IRA).
4. Some employer retirement plans have more creditor protection than other types of retirement accounts, so those that are worried about creditors coming to collect may want to leave their funds in an old employer account if the new account has less creditor protection.
5. You left your employer of the old plan the year you turned 55 or later and plan to take a withdrawal before age 59 ½.  Employer plans may allow you to take a withdrawal in this scenario without being subject to the early withdrawal penalty that will apply to an account such as an IRA if you take a withdrawal after age 55 but before age 59 ½.
6. Moving funds out of an old plan can be challenging with confusing paperwork and lack of support depending on the company where your current funds are held.  It is important to keep in mind that you are likely going to have to move this money at some point, so avoiding the potential administrative headache of moving funds out of an old employer plan may end up just delaying the inevitable.

 Reasons not to leave your money in the old plan:

1. You can’t make additional contributions.
2. Higher fees may apply.
3. Better and more investment options may be available moving it to another account.
4. Managing investments becomes more problematic the more accounts one has.
5. The old employer can close your account by moving it to an IRA of their choice if you have a balance between $1000 and $5000.  That IRA may not be allocated in alignment with your goals and creates an additional account for you to manage.  The previous employer can cash out your money if your balance is less than $1000, making those funds subject to taxation and a possible penalty if they are not rolled over within 60 days.
6. Old employer retirement plans tend to be more neglected, or even forgotten, than active employer plans and individual retirement accounts (IRAs).

Rollover Your Funds to Your Current 401k

Reasons to rollover to your current 401k:

1. Your current plan may have lower expenses, including low-cost investment options.
2. Your money continues to grow tax-deferred and no taxes will be due until you take withdrawals.
3. Rolling over funds with your current 401k consolidates your investments, making it easier to manage your investments by having one less account to worry about.
4. Required minimum distributions (RMDs) of your current 401k may be delayed if you are actively employed.

Reasons not to rollover to your current 401k:

1. You don’t like the investment options in your current plan.
2. Your current employer plan does not allow incoming rollovers (most do).
3. You plan to rollover the funds to an IRA instead.

Rollover Your Funds to an IRA

Reasons to rollover to an IRA:

1. You may have more and better investment options with an IRA.
2. You consolidate your holdings, reducing the number of accounts you need to manage, if you already have an IRA.
3. You want an advisor to manage the investments for you.
4. Your money continues to grow tax-deferred and is not taxable until you take withdrawals, unless you move pretax 401k money into a Roth IRA instead of a traditional IRA.  If you do move money from a pretax account into a Roth IRA, make sure it is by design and you are aware that any amount going from pretax to a Roth component is taxable.  I came across a case where a person moved over $300,000 from their 401k pretax balance into their Roth IRA, unaware that amount became fully taxable in that year, and ended up with a very surprising and very high tax bill!!

Reasons not to rollover to an IRA:

1. If you are looking to simplify your investments, you aren’t reducing the number of accounts if don’t already have an IRA.
2. You will have a lot more investment options available, depending on where your IRA is set up, which can just add to confusion for some.
3. IRAs generally have higher fees and investment option (fund) expenses than company plans.  Also, additional investment advisory fees may apply if your IRA is managed by an Investment Adviser Representative.
4. RMDs will apply once you reach RMD age regardless of your employment status.
5. If you left your employer the year you turn 55 or after, rolling over the funds to an IRA eliminates the early penalty free withdrawal available from the 401k until age 59 ½.  If you left your previous employer plan the year you turned 55 or later and plan to take a withdrawal before age 59 ½, leaving the money in your old employer plan is likely going to make the most sense.

Cash Your Old Plan Out

Reasons to cash out:

1. Simply put, you have the money to use as you wish.  If you leave your job during or after the year you turn 55, there is no 10% early withdrawal penalty for certain plans.

Reasons not to cash out:

1. Withdrawals from 401ks are subject to a mandatory 20% federal tax withholding.
2. You will be subject to taxation and a possible penalty of 10% if you are under age 59 ½.
3. You reduce the amount available for retirement, which will negatively impact your ability to reach your retirement goals if the funds you are withdrawing are needed to help reach those goals.  We often strongly caution people against using their retirement accounts for something other than retirement unless they know they have the ability to do so without jeopardizing their retirement plans!

Your decision on what to do with an old employer plan is an important one and you want to carefully consider what the best approach is for you based on your financial goals.   Typically, we do recommend rolling over old retirement plans either to your current 401k or into an IRA but there are occasional exceptions.  If you want assistance on determining what you should do with an old employer retirement plan, you can contact us and we will help determine the best option based on your unique financial situation and goals.

 To learn more about Quality of Life Planning®, click here. If you need help aligning your money with your values, priorities, motivations, and goals, schedule a meeting with us. It would be our pleasure to assist you.

This material is intended for educational purposes only. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. Dorval & Chorne Financial Advisors is a registered investment adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training.