Should I leave my 401(k) with my old employer, roll it over to a plan my new employer offers, or do something else entirely?
Additional Background Information:
I'm 52 years old and have $150,000 in a 401(k) from my old employer. I now work for an employer that provides a pension, to which 6% of my salary goes, but they also offer a 403(b) and a 457 plan. My current employer makes no contributions to any plan, and I can't contribute to my old 401(k) while it stays with my old employer. Should I leave my 401(k) where it is, roll it over to a plan my new employer offers, or do something else entirely?
You have three choices for the funds in your old 401(k) plan. The two you mentioned (leaving it where it is or rolling it over to your new employer) and third, rolling it over to an IRA. The best option for you would depend on several different factors, but generally you will want to roll the old 401(k) either into the new employer’s plan or into an IRA.
ROLLING OVER TO THE NEW EMPLOYER’S PLAN
The main advantage of rolling the money to the new employer’s plan is the money will have the greatest creditor protection afforded by law. The law that governs 401(k)s and many other employer retirement plans offers you unlimited protection of your retirement money from creditors and lawsuits. This can be extremely important for business owners, surgeons, or others who are at a heightened risk of being sued.
I often advise clients with a heightened risk of lawsuits to leave money in their 401(k) for the asset protection provide provided under ERISA. If you are exposed to significant liability or have a high chance of being subject to a lawsuit, leaving the money in the 401(k) is likely the better idea. If you’ve received advice to roll over to an IRA and would like a second opinion, please feel free to schedule a no-cost consultation.
ROLLING TO AN IRA
The main advantage of rolling the funds into an IRA is you will have more control over the investments and the costs of the account. Many 401(k) plans have limited investment choices, high cost funds, and high account fees; leaving participants with poor options and lower returns. 403(b) and 457 plans are notorious for having high costs and often have very limited investment choices, including potentially only annuities. Check the investment choices and costs of your current employer's plans. If they are high or you have poor investment choices, consider rolling the funds into an IRA where you can choose better investments and enjoy lower fees.
Improved Potential Return
Rolling over to an IRA can also have the benefit of allowing it to be managed by a professional financial advisor, often at the same cost as what the old 401(k) was charging you. Research by Vanguard, Texas Tech University, Morningstar, and others have demonstrated that comprehensive advisors greatly increase investor returns over long periods, even after paying for their fees. (The research also shows advisors that only offer investment management struggle to improve investor returns.)
WHY NOT JUST LEAVE THE MONEY IN THE OLD 401(K) PLAN?
When choosing between two 401(k) plans, I generally advise clients to favor rolling the old 401(k) over to the the new employer’s plan. This is solely for simplicity - because you don’t want to have a dozen small retirement plans floating around when you retire.
But just because you should favor the new plan, does not mean it is the right choice. Check out the fees and investment options in the new plan to make sure you are not costing yourself money either through high fees or poor investment choices. If your new plan is undesirable with high fees or poor investment choices, you have another reason to consider rolling to an IRA .
Tax Planning With Your Retirement Plan
Investments are just one small part of your retirement. When I work with clients on retirement planning, we integrate their investmenting strategy alongside maximizing Social Security, expense-specific inflation projections, multi-decade tax planning, and more. Learn more about what comprehensive retirement planning looks like.
The tax law governing 401(k)s is different than for IRAs, including the Required Minimum Distribution rules. You can potentially preserve a significant percentage of your portfolio in tax savings through advanced tax planning techniques, assuming you located your retirement funds in the appropriate retirement account. Rolling your old 401(k) to the right place can help set you up to take advantage of these techniques.
Joshua Escalante Troesh is a Tenured professor of Business, a CFP financial advisor, and the founder of Purposeful Finance. He is also the owner of Purposeful Strategic Partners, a fiduciary and fee-only financial planning firm. He has been quoted in Forbes, Consumer Reports, CNBC and many other media. Meet with Josh