Rollover your 401k or leave it?

I had never heard of this rule, so this article from the Wall Street Journal about a 401k participant taking a withdrawal taught me something new.

Summary - the participant wanted to withdraw from stocks, to reduce their stock exposure. The plan forced them to take the withdrawal out of their money market fund, actually increasing their stock exposure!

Again this isn’t something I’ve come across myself to be totally honest - 401k plan documents dictating what should be sold to fund withdrawals. But then again, we typically advise clients that they should roll over their old 401k plans (or TSPs, 403bs, SEP IRAs, etc. ) into IRAs of their own.

There’s a number of reasons why we recommend this, and some circumstances when we don’t. Read on to learn more.

Reasons to rollover your 401k into an IRA:

1. More Investment Choices

• 401(k): Limited to the investment options the plan offers (usually only mutual funds).

• IRA: Offers a broader range of investments like stocks, ETFs, bonds, mutual funds, and sometimes alternative assets.

2. Lower Fees (Potentially)

• Some 401(k) plans charge high administrative or fund management fees.

• IRAs often offer lower-cost investment options, especially if you go with low-fee providers like Vanguard, Fidelity, or Schwab.

3. Simplification

• Having multiple old 401(k)s adds unnecessary complexity and can be a hassle to manage.

• Consolidating into an IRA makes it easier to keep track of your retirement funds, manage your asset allocation, and take required minimum distributions (RMDs) later on.

4. Easier Beneficiary Management and Estate Planning

• IRAs can offer more flexible options for naming and managing beneficiaries, and one less account you need to update over time.

5. Better Control Over Withdrawals

• Some 401(k)s have withdrawal restrictions or penalties after separation from service.

• IRAs give you more flexibility in how and when you withdraw funds, though standard early withdrawal penalties still apply before age 59½.

6. Roth Conversion Opportunities

• With an IRA, it's easier to convert traditional funds to a Roth IRA, allowing you to manage future taxes strategically (especially in low-income years).

But we don’t just automatically roll over every work retirement account into an IRA or as few of accounts as possible. 

There are some circumstances where you may want to leave the money there and keep it separate. We’ve decided with a number of clients to leave their 401ks at their old plan for one reason or another.

When Not to Rollover (Considerations)

• If you’re 55–59½ and retired, you can take penalty-free withdrawals from a 401(k) (but not from an IRA).

• Creditor protection: 401(k)s often have stronger protections under federal law compared to IRAs (varies by state).

• Institutional investment options: Some 401(k)s offer exclusive low-cost funds you can’t get in an IRA.

• Waiting on employer match: some small companies have irregular employer matches and profit sharing contributions. Some clients feel better leaving their account and balance there to be sure they get those additions.

So this isn't something you do day one when you leave a job, but we think within 90 days you should consider what the next steps are on your retirement account. If the decision is to keep it there then that's okay, but don't just leave it lingering.