Carolyn Geer wrote an article in the Wall Street Journal indicating there are over 15 million instances of 401(k) and other retirement accounts being left behind in ex-employers’ plans. So when is it smart to leave an account at an old employer vs. rolling it over to a new 401(k) or IRA? Most of this should be a review, but let’s look at a couple key factors.
If your ex-employer is small, you are probably paying higher-than necessary fees and should get out. Keep in mind that more and more employers are charging ex-employees account-maintenance fees ranging from a few dollars per year to more than $100 per year. Rolling funds to an IRA or Roth IRA will avoid these fees and may provide access to less costly investment options.
2. Investment Choices
Many 401(k) plans have a limited number of investment options. There are certainly advantages to rolling funds into an IRA with 23,000 mutual fund options rather than leaving the funds in a 401(k) with a dozen options. More choices allows you an opportunity to find the best offerings in each asset class. Additionally, a 401(k) may not have any investment options in certain asset categories. For instance, the IHC 401(k) plan, a retirement plan many people in Utah participate in, does not have a single mid-cap stock investment option. This shortcoming can be addressed in an IRA.
3. Account Access
Be aware that 401(k)s and IRAs have different withdrawal rules. With some exceptions, assets in traditional IRAs need to be left alone until you turn 59.5 to avoid the 10% penalty on early withdrawals. Some 401(k)s, however, allow you to take penalty-free withdrawals at age 55 or older when you leave your job.
4. Required Minimum Distributions
Both 401(k)s and IRAs require the owner to begin taking withdrawals no later than age 70.5 (after all, the government wants its cut). However, Roth IRAs are not subject to RMDs. When you convert retirement dollars to Roth dollars, you pay taxes on the converted amount, but all withdrawals from the account are tax-free. Thus, the government doesn’t require you to take distributions because it has already been paid.