Benefits of rolling over your 401(k)
You can consolidate your 401(k) accounts
Especially if you change jobs often, you might find yourself with many 401(k) accounts scattered around. The more accounts you have, the harder it may be to actively make decisions.
You could possibly have more investment choices
With your 401(k), you are restricted to the investment and account options that are offered. An IRA can give you a more diverse option of items to invest in.
This may include investing in individual stocks, bonds or other vehicles that may not be available in your 401(k).
You can’t add to the 401(k) at your previous employer. But, for instance, if you roll it over into a traditional IRA, you can add to that traditional IRA. You will have to follow the annual IRA contribution guidelines.
You’ll have the choice to bring the account anywhere you’d like
Perhaps you already have a financial adviser or financial planner that you work with. Or you have a brokerage where some of your money is being managed. These may be good reasons to roll over your 401(k).
Reasons you may choose not to roll over your 401(k)
You like your current 401(k)
If you are in a low-fee environment, you might want to take advantage of this and remain with your current 401(k) plan. Compare this fee structure to the costs of having your money in an IRA.
If it isn’t broke, don’t fix it. If you like the investment options you currently have, it might make sense to stay in your previous employer’s 401(k) plan.
A 401(k) may offer benefits that an IRA doesn’t have
If you keep your retirement account in a 401(k), you may be able to access this money at age 55 without incurring a 10 percent additional early withdrawal tax.
One way to avoid a 10 percent early withdrawal penalty with a 401(k) is if distributions are made to you after you leave your employer, and the separation occurred in or after the year you turned age 55.
This would not be the case in an IRA, where you would generally incur a 10 percent penalty when withdrawing before 59 1/2.
You may be able to postpone required minimum distributions (RMDs) for funds in a 401(k)
You currently don’t have to take an RMD until either April 1 of the year following the later of the year you turn age 70 1/2 or the year you retire.
So, if you’re still working at that age, you may be able to postpone some of your RMDs if the money is kept in a 401(k).
You can’t take a loan from an IRA
If you roll over the funds into an IRA, you will for sure not have the option of a 401(k) loan. While loans from your retirement funds are not advised, it may be good to have this option in an extreme emergency or short-term crunch.
Other items to consider
Net unrealized appreciation (NUA) and company stock in a 401(k)
If you have company stock in a 401(k), it may be beneficial to transfer those shares into a taxable brokerage account to take advantage of NUA. NUA is the difference between what you paid for company stock in a 401(k) and its value now.
If you paid $20,000 for company stock and it’s now worth $100,000, the NUA is $80,000.
The benefit of NUA is that you’d pay ordinary income tax, right now, on your basis (what you originally paid). That can be up to 37 percent, which is now the highest tax bracket, says Landsberg.
You’ll enjoy capital gain treatment, which even at the highest tax bracket is only 20 percent, on any appreciation.
Landsberg says NUA makes the most sense, the higher the difference in tax rates.
“Net unrealized appreciation is a very powerful tool, if used correctly,” Landsberg says. “… So you can get creative and potentially have a pretty nice windfall if you use the NUA rules correctly.”
An NUA may be subject to a 10 percent early withdrawal tax prior to age 59 1/2.
The entire vested balance in your plan needs to be distributed within one tax year, within the same tax year. It also needs to be completed within one year of a “triggering event.” Triggering events include: death, disability, separation from service or reaching age 59 1/2.
Beware 401(k) balance minimums
If your account balance is less than $5,000, your employer may require you to move it. In this case, consider rolling it over to your new employer’s plan or to an IRA.
Always keep track of your hard-earned 401(k) money and make sure that it is invested or maintained in an account that makes sense for you.
If your previous 401(k) has a balance of less than $1,000, your employer has the option to cash out your accounts, according to FINRA.