When NOT to Roll Over a 401(k) | Main Street Financial

[Note: Although this article refers to 401(k) plans, the same points apply to 403(b) and 457 plans]

If you have already landed a new job, you might want to check out your new employer’s 401(k) plan and consider a rollover to that, instead of to an IRA. If any of the following situations apply to you, you should consider NOT rolling over to an IRA:

1) If your previous 401(k) has good investment choices with low fees and you will manage the portfolio yourself . . . . Some plans, especially the very large plans, are able to offer funds with low institutional management fees and a wide range of fund choices. But very often smaller companies and not-for profit organizations offer funds with high fees. They save on plan administration fees by passing hidden investment fees on to their employees.

2) If you are close to or older than 70 ½ and plan to continue working . . . . The IRS requires you to start taking minimum required distributions (MRD) from your IRA or 401(k) after age 70 ½. But if you are still working, you are not required to take MRDs from your 401(k), unless you own more than 5% of the company. So if you don’t need the money, you might want to roll your old 401(k) into the new plan until you stop working and possibly move into a lower tax bracket.

3) If you might need to borrow from your new 401(k) . . . . First, we usually recommend that clients do not borrow from their 401(k) plans. If you think you need to access your retirement funds early, we probably have other issues to discuss. But, back to the loan: You cannot borrow money from an IRA; to get to those funds you have to make a taxable withdrawal. Many 401(k) plans do allow for loans of up to $50,000 (limited to 50% of your vested balance). You cannot borrow from the plan if you no longer work there; so we are only talking about your ability to borrow from a new 401(k) plan.

4) If you hold company stock in your 401(k) and it has risen a lot in value . . . . This is known as “net unrealized appreciation” and there could be a significant tax savings by not rolling it into an IRA. If you withdraw the stock and put it into a non-IRA account, you pay ordinary tax but only on what you paid for the stock. But the gain is taxed at reduced capital gains rates when you sell it. Rolling the stock into an IRA would result in you paying ordinary tax on the whole thing when it is withdrawn from the IRA.

If your new plan does not accept rollovers or if you do not yet have a new job, you should create a separate IRA account, designated as a “Rollover IRA”. This allows you to temporarily park your funds and, at some time in the future when you do go to work for a company that accepts rollovers, you can then complete the rollover to the new plan.

Even if you already have an IRA account, it’s generally a good idea to set up a new Rollover IRA account so you don’t commingle the rollover with the other IRA funds. The reason for this is that, if you have ever made non-deductible contributions to the IRA, you cannot roll it to a 401(k). This could occur if you made a contribution to the IRA and found out later that part of it is non-deductible because your income exceeds the limits. Having a separate Rollover IRA makes it easy to avoid this issue.

There are many factors to consider when deciding whether or not to roll-over your 401(k), 403(b) or 457 plan. This could be the right time to take stock of your finances and consult a retirement planning specialist. To speak to a Certified Financial Planner™, with no-obligation, please call us at (914) 242-0553.

When to Consider NOT Rolling Over Your 401(k)