Retirement Plan Rollovers – 101

Do you have an old retirement plan? Is it still with your previous employer? Or has your company just been purchased / merged, and the new company has a new plan? Each year many people face this situation. So, what should you do with your old retirement plan?

You will typically have the option to rollover the old account into your new 401k, 403b, 457 or other retirement plan. Then there is another alternative to consider. Instead of rolling it to the new plan, you can roll it to an IRA or individual retirement account. So, which is better?

Oftentimes you will find that the new plan is very similar to your old plan in terms of options, fees, etc., so it seems like a no-brainer to do the rollover from your old account into the new account. What may not be discussed when your options are presented to you are the downsides to rolling the old money into the new employer work plan.

Below are some of the key things you should consider when making your decision;

1. Flexibility – If you roll your current retirement account to the new company’s plan, your money is often stuck in the new plan until you terminate employment whether its voluntary (retire or take a new job at a new company) or involuntarily (you are terminated or the company shuts down). Unless the plan offers in-service rollovers, 401k plans usually do not let you move your 401k funds to an IRA until after you terminate employment.

However, most 401k plans allow you to roll your IRA into the 401k at any point. So, by rolling your funds into an IRA you maintain flexibility / options for the future. With an IRA you keep the key and can unlock the box to move money around when you are ready. With a 401k, your company keeps the key and puts rules around when you can open the box to move money around.

2. Investment Options – 401ks make you choose from a list of around 20-40 investment options selected by your employer. IRAs allow you to invest in thousands of options that include stocks, bonds, exchange-traded funds, and mutual funds.

3. Rules – 401k accounts have lots of rules that must be followed. Your employer can include or not include different options. Can you do in-plan Roth conversions? Can you take a loan out? Can you do in-service distributions? 401ks are required to withhold 20% from any distributions for federal taxes. IRAs also have rules, but they are not employer dependent. For example, you can always convert your IRA to a Roth IRA, you can’t take loans, and you are not required to withhold 20% in taxes on distributions. It is important to understand the difference between each option and the rules before rolling your money over.

4. Fees – 401k accounts have more layers of fees such as participant account fees, fund fees, admin fees, loan fees, etc. IRAs give you access to low-cost investment options at the major brokerages such as Schwab. Most custodians or places that offer IRAs have $0 account fees and minimums for IRAs.

5. Other Differences – did you know that there are differences in many other areas, too, such as creditor protection, minimum distribution requirements, early withdrawal exceptions, fund share classes, withdrawal flexibility, and more.

Deciding what to do with your retirement account is a big decision. This year is a big year for these decisions in the Augusta area. We encourage you to discuss your options with a certified financial planner that will provide unbiased feedback for your situation. You want to consider all the pros and cons to help you make the best decision for your situation.

by: Clayton Quamme, CFP® a financial planner with AP Wealth Management, LLC ( AP Wealth is a financial planning and investment advisory firm with offices in Augusta, GA and Columbia, SC.


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