If you have an old 401k, you have an important decision to make. Should you leave it with your former employer, roll it over to an IRA or roll it over to a new employer plan or should you do a rollover to Roth 401k or Roth IRA?. (Actually, we’ll ignore this last question since I’ve written an entire post on the issue.
The decision you make will have a huge impact on your choices (possibly) many years from now so choose carefully.
Benefits of Rolling Your Old 401k to an IRA Rollover
The main benefits of a tax-free IRA rollover are investment choices, simplification and transparency. If you have various IRAs and old 401ks from previous employers you can roll them together. This means instead of getting statements from all over town you’ll get one. That will make it easier for you track your investments rather than ignore them. And most people find it very difficult to keep tabs on their investments when they are scattered all over.
In addition, when you roll your old 401k over to an IRA, you have virtually limitless investment choices and the opportunity to re-balance your account. That’ important because many 401k plans have very limited investment options. Also, make it difficult and restrict how often you can re-balance your investments. When times are good, that’s not a big deal. But when the market is in melt-down phase, it could make a huge difference.
Benefits of Keeping Your Money in Your old 401k
As attractive as rolling your IRA over may sound, there are some benefits to keeping your 401k with your former employer. While it doesn’t impact many people, it might be nice to know that 401k plans offer protection from creditor law suits that IRAs do not.
Another benefit is that you can may take withdrawals at age 55 (rather than 59 ½) if you separate from service with no penalty. I personally don’t see this as a huge benefit. In fact, I like having as large a wall as possible between me and my retirement money. The longer you keep your retirement money in a retirement account, the greater the benefit of tax deferral. Just the same, if accessibility is important to you, keeping the money in the old plan may be the way to go.
Benefits of Rolling Your old 401k to your new employer.
For the right person, this might be a great idea. This is especially true if you are interested in holding jobs in retirement. If you go this route, you can continue growing the money tax deferred even after you reach age 70 ½. That’s right. While people with IRAs have to take distributions at that age, if you are still working, you won’t be forced to take anything out of your 401k no matter how old you are.
You can see that there is no one right decision for everyone. It really depends on what’s most important to you.
For most of us who plan on not working after age 70 ½, rolling over an old 401k to an IRA is smart. The flexibility of re-balancing at will and number of investment options make this super attractive. If on the other hand you’re under 55 now and think you might need to get your hands on that money before you reach 59 ½, leaving the money in your former employer’s plan is the way to go. Last, if you think you’re going to be working past the age of 70 ½ and are pretty confident that you won’t want to take distributions, rolling the money to your new employer is a smart consideration.