Should You Move Your Old 401(k)? Here's What You Should Know Before Deciding

Are you sitting in an old 401(k)/403(b) account, unsure what to do with it? It's more common than you think! We see people who actually forget about these forgotten funds, let's make sure you're not one of them and learn more about the pros and cons!

Many people do decide to move old work accounts to their own IRA for the advantages, but there are downsides we think you should know beforehand.

We believe in transparency… Yes, many choose to pay us based on managing their money, but we want people to know potential drawbacks to make sure it's the best choice for them to work together before doing so!

Advantages of Rolling to an IRA:

1.     Investment Options Galore: Moving your old work account into an Individual Retirement Account (IRA) unlocks a world of investment possibilities. With an IRA, you can choose from a wide range of investments tailored to your preferences. You should compare your current investment choices with what an IRA offers to see if there's a better fit for you.

2.     Professional Help: If you prefer help from a professional team, using that team to help manage your IRA often opens the door to what teams are willing to work with you based on their minimum asset level. Many people prefer paying their fee from an investment account rather than from cash.  If you don’t meet the teams minimum and don’t want to pay cash rolling an IRA to them could help.

3.     Simplified Management: Consolidating your retirement accounts into one IRA makes life easier. You, or your team, can keep a close eye on your entire portfolio, monitoring your investments are balanced per your portfolio goals and tax-efficient considering what assets should be held it certain tax type accounts.

4.     Inheritance -  Combining accounts into fewer accounts help simplify things for your heirs. Making inheritance smoother when the time comes.  Make sure regardless of where you have assets you have your beneficiaries listed correctly!

5.     Avoiding Missed Mandatory Distributions: With fewer accounts to track, you're less likely to miss required minimum distributions (RMDs). Avoiding tax penalties for missed distribution amounts can save you headaches with the IRS and cash!

Drawbacks to Consider: While there are many advantages to rolling an old work account to an IRA, you should be aware of potential drawbacks.

1.     Backdoor Roth Complications: If you're a high earner and use backdoor Roth IRAs, rolling over your old 401(k) could complicate this. It's pivotal to understand the current laws and how this move might impact your tax strategies.

2.     Early Access Limitations: While 59.5 is the usual age to access retirement funds penalty-free, there's a nifty trick with 401(k)s. If you retire at 55, you could tap into your 401(k) funds penalty-free. There are strict IRS rules on this so make sure to learn them before trying to do this).  Rolling the 401(k) into an IRA could delay this perk though! Be sure to weigh the options carefully.  Pro-Tip: There is a strategy around this we often use to allow most of the money to an IRA and leaving enough in the 401(k) if you want access)

3.     Reduced Legal Protection: 401(k)s offer protection from creditors under ERISA regulations. Rolling over to an IRA could remove some ERISA protection. If you are possibly going to be sued in the near future this can be important!

4.     Cost Considerations: While IRAs offer flexibility and investment options, they may not always be cheaper than your current plan. Evaluate the fees associated with both options.  Consider what you’ll get the best value from.

Deciding whether to roll over your old 401(k) into an IRA isn't a one-size-fits-all decision. At our West Michigan financial planning firm, we believe in empowering individuals to make informed choices aligned with their goals. We encourage you to weigh the pros and cons carefully, considering your unique circumstances and aspirations. Whether you choose to roll over or not, what matters most is that you're making the decision that's right for you.

Options people have when leaving an employer:

1. Leave the money in former employer’s plan, if it’s permitted.

 2. Roll over the assets to new employer’s plan, if one is available and rollovers are permitted;

3. Roll over to an IRA; or

4. Cash out the account value.

Disclosures:

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. AI (artificial Intelligence) sourced articles may be prone to error, due to the vast information they assemble from the internet. Always confirm any questions or concerns you may have with an experienced professional. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual