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Changing jobs? How Should You Roll Your Old 401(k) Plan

| July 14, 2016
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Should you roll your old 401 (k) balance to your new employer's 401(k) plan or to an IRA? Assuming both options are available to you, there's no right or wrong answer to this question.  It’s a little bit like the choice between getting your ice cream in a cone or a bowl. There are arguments to be made on both sides.  You need to make a decision based on your own needs and priorities. 

Here are a few things to think about:  

Reasons to roll over to an IRA:

  • More investment options. You generally have more investment choices with an IRA than with an employer's 401(k) plan.  You’ll be able to invest in ETFs, mutual funds, and individual stocks.  By contrast, employer-sponsored plans typically give you a limited menu of investments (often only mutual funds) from which to choose.
  • Greater Fee Transparency: With a 401 (k), there are often plan administration fees.  There are typically no additional administration fees associated with an IRA, other than the operating expenses of ETFs and mutual funds (which are present in all accounts, regardless of whether or not it’s an IRA, employer-sponsored plan, or brokerage account), and commissions associated with trading individual stocks.   
  • Roth Conversions. You can roll over (essentially "convert") your 401(k) plan distribution to a Roth IRA. You'll generally have to pay taxes on the amount you roll over (minus any after-tax contributions you've made), but any qualified distributions from the Roth IRA in the future will be tax free.

Reasons to roll over to your new employer's 401(k) plan:

  • Loan Provisions. Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer's plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money. You can't borrow from an IRA. You can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties.
  • Greater creditor protection.  Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors, with few exceptions, cannot seize your plan funds to satisfy any of your debts and obligations, regardless of whether you've declared bankruptcy. In contrast, any amount you roll over to a traditional or Roth IRA is generally protected under federal law only if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particular state.
  • Postpones required minimum distributions. For traditional IRAs, these distributions must begin by April 1st following the year you reach age 70½. However, if you work past that age and are still participating in your employer's 401(k) plan, you can delay your first distribution from that plan until April 1st following the year of your retirement. (You also must not own more than 5% of the company.)

One additional caveat - if you have employer securities in your employer-sponsored retirement plan – such as the Proctor and Gamble PST – you may consider Net Unrealized Appreciation (NUA) tax strategies.  If this is the case, be sure to talk to your financial and tax advisors to understand your opportunities.   

If you’d like to discuss your 401(k) rollover options further, please contact Steve Hengehold via email [email protected] or 513-598-5120.

Date Posted: 07/14/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us.  Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence.  If you would like to discuss your Wealth Accumulation or Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120.  Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help.    





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