Many retirement savers changing jobs, simply transfer funds directly from their previous employer's 401(k) into their new employer's retirement plan. They do this with a quick phone call to the new plan administrator. However, in some cases, that's not always the best move.
CNBC’s recent article, “New job? How to become a retirement-plan rollover champ,” explains that there's no blanket answer for every situation. Each individual person will need to determine the right solution. The article does provide six options to consider.
- Roll over into a new IRA. Transferring funds from a previous 401(k) into a new IRA, preserves the most investing flexibility. Company plans may restrict options to a handful of mutual funds, but an IRA allows an investor to select almost anything—from bank certificates of deposit to real estate. However, a 401(k) usually has lower costs than an IRA. As long as the 401(k) account holder is still employed, he or she can borrow from it.
- Keep your funds in a former employer's plan. In some cases, it is best to leave retirement funds in a former employer's plan, rather than transfer them to a new employer's plan. That may be true if the old plan has lower investment costs or better investment choices than the new employer plan.
- Transfer to a new company plan. Transferring 401(k) funds to a new company-sponsored retirement plan can be better than leaving them where they are, if the new plan has more investment choices or lower fees. It may also be wiser than transferring to a new IRA, because of advantages a 401(k) has over an IRA, like the ability to borrow against account funds. Savers who have reached age 55 and stopped working, can withdraw 401(k) funds without having to pay the 10% penalty otherwise imposed on early IRA withdrawals.
- The In-plan Roth conversion. Some plans allow you to transfer all or some of a 401(k) plan's funds into a Roth account within the same plan, saving on taxes long-term. That’s because the future Roth 401(k) distributions won't be subject to taxes. However, the downside is that the account holder must pay income taxes on the amount converted. The account holder's age is another key consideration. A younger person can pay taxes on a Roth conversion and then watch the remainder grow tax-free until retirement, but a senior doesn’t enjoy that same benefit.
- Withdraw the funds and convert to a new Roth IRA. You could take your money from an ex-employer's retirement account and use it to fund a new Roth IRA outside the plan can, like a transfer to a new IRA, increase investment flexibility over an in-plan conversion. When compared to a similarly flexible IRA, an out-of-plan Roth has attractive long-term estate planning benefits.
- Grab the lump-sum conversion and pay tax. Rarely will an advisor recommend taking a 401(k) distribution as a lump sum, paying tax on it and placing it in a regular brokerage account. However, this may be a good move, if the plan contains employer stock. When transferred from a tax-advantaged account, the difference between the shares' current value and their average cost (the net unrealized appreciation) may be taxed as capital gains, rather than ordinary income.
Reference: CNBC (May 23, 2018) “New job? How to become a retirement-plan rollover champ”