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| To Roll or Not to Roll By Charles A. Smith, MBA, CPA, CLU, ChFC |
admin writes, "When starting a new job, it is important to decide what to do with the money you have saved in your previous employer’s 401(k) program. Is it more beneficial to roll over your old 401(k) into an IRA, as opposed to leaving the assets in the former employers 401(k) or rolling the assets to your new employer-sponsored plan? The answer: The benefits to roll to an IRA are substantial, however it depends upon your specific needs and requirements as to whether you should proceed with a rollover or not.
One of the biggest benefits to rolling your assets to an IRA is control—you gain greater control over your retirement savings. If you roll your money into an IRA, you have greater freedom to select from a wide range of investments that may not have been available in your former employer’s 401(k) program. Even if you are happy with the investment choices currently offered, it is difficult to anticipate if your former employer could change plan providers and/or investments, or the current funds in your former employers plan begin to underperform their peers. If that happens, you would be stuck with a new set of investments, or a poor performing group of funds that you aren’t happy with. Additionally, if the investments in your 401(k) are publicly traded, you should be able to invest your self-directed IRA money in those same funds if you do rollover.
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A second advantage of rolling to an IRA is the flexibility afforded to you to name or change your beneficiaries on your IRA as you see fit. Often, changing an IRA beneficiary only requires asking your IRA custodian for a new beneficiary designation form that you can complete and send in. Alternatively, with a legacy 401(k) at a former employer, it could be more complicated. You are still allowed to change your beneficiary by filling out a form, but it could be harder to obtain the form from the former employer, who doesn’t make it a priority to handle requests from someone who is not a current employee. Additionally, you might be limited in the number of times you can change your beneficiary designations.
On the other hand, there are benefits to leaving the assets within the old 401(k) or rolling the assets to your new employer’s retirement plan. First, if you are younger than 59½, it might make sense to leave the assets within a 401(k) to allow for access to the assets in case of an emergency via the 401(k) loan provisions, or the 401(k) hardship withdrawal provisions. IRAs do not allow for loans. If the IRA owner were to take the money out of the IRA prior to 59½, they could be subject to a 10 percent early withdrawal penalty. Once the owner is beyond 59½, this becomes less of an issue as the IRA owner can now take money out of the IRA as they wish.
Title 1 creditor protection is another possible reason to leave the assets within the 401(k). Title 1 protection protects qualified plans, such as 401(k)s, from creditors.
Above are just a few reasons why you should or should not roll your 401(k) to an IRA. You should always consult with your financial advisor when making an important financial decision such as this. The decision you make could have significant consequences for both you and your beneficiaries.
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Chuck Smith is the President and CEO of Academy Advisors – an Arizona Company offering excellence in financial planning and business advisory. Academy Advisors has been consistently ranked nationally in the top 1% of firms providing investments, insurance, and retirement planning.
He can be reached at 480-545-8390 or on the web at www.academyadvisors.com.
He started the firm in 1999 with the unique idea that his team would be staffed entirely of financial specialists with advanced degrees and credentials, and that the delivery of product would merely be incidental to offering the highest quality analytical analysis. His firm is dedicated to providing clients with both the professional and individual attention necessary to help them achieve their financial goals
He lives in Gilbert, Arizona with his wife and four children.
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Posted on Aug 31, 2007 18:49pm.
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