Many people wonder why they would ever roll out of their 401(k) into an IRA. Whether it’s a good idea or not depends on the details of your situation. If you work with an advisor who has extensive training in all aspects of retirement planning, like a CERTIFIED FINANCIAL PLANNER™ professional, and your advisor represents your interests at all times – a fiduciary advisor -- and your advisor only gets paid by you and does not get paid by products – a fee-only advisor, you can expect this advisor to help you accurately review what’s best in your situation.
The basic things to consider:
Investment costs. What are the internal expenses of the investment options inside the plan? Some plans have low-cost investments while others do not. Check the plan documents and write down the exact costs of the investments in your account.
Administrative costs charged to your account. Under current law, all costs of the plan that are charged to your account need to be disclosed to you. Your human resources department should have a copy of the current disclosures.
Investment options available. A company retirement plan will always have a limited menu of investment options. It could be a simple as three broad funds. Sometimes the list includes dozens of choices. Have a look to see if the list includes everything you want to use in your retirement allocation.
Your plan’s inheritance rules. Generally, a spousal beneficiary can keep a 401(k) account and treat it as their own. Each company plan document spells out how non-spouse beneficiaries must receive the funds. If you would like to have some of this money last long enough to benefit a child or grandchild, your plan will likely not support this goal.
Some trickier things to think about:
Does your account include company stock? If so, there are tax-management strategies you can use in a rollover to reduce the effective tax on the company stock when it comes out of the plan. If you do a rollover, you can use a special technique known as net unrealized appreciation, or NUA. It could reduce the tax on the stock by as much as two-thirds depending on your situation.
Does your plan include “unicorn” investments? Some plans include stable value funds or guaranteed accounts that pay more than current short-term interest rates. Often these accounts where set up long ago and cannot be replaced in an IRA today. The fact that they don’t exist today makes them a “unicorn.” If these accounts are important to your asset allocation plans, you need to keep some of your money in the plan in order to have the “unicorn” as part of your allocation.
Will you need the money before age 59.5? Many company plans allow separated employees to remove funds without penalty as early as age 55. Check your plan document for details.
Do you have after-tax money in the plan? If you do, and if you want to roll over to an IRA, you can roll the after-tax money to a Roth IRA and the pre-tax money to a traditional IRA, but only if you roll the entire plan balance out. No partial rollovers.
The bottom line
Most people in America work for small employers. Most small employers have small retirement plans. Many times, small retirement plans are bundled products that include added fees and costs. In this case, a rollover IRA holding a professionally selected allocation of index funds will be a better asset allocation and will cost less than the company plan.
When you roll over and set up a professionally selected investment allocation you most likely will be working with a financial planner. If you are careful about working with an advisor who is your advocate at all times – a fiduciary advisor, and one who works only for you and not for any product manufacturer – a fee-only advisors, then you can expect to talk about your larger financial plans as part of the rollover discussion. If you decide to work with a CERTIFIED FINANCIAL PLANNER™ professional, you will be engaged in a comprehensive financial plan that includes all aspects of your financial life, not just the rollover alone.
By using the rollover conversation as the beginning of a financial planning process, you are getting much more than a new account number with different investments. You are launching yourself into safe and predictable retirement.
And yes, I’m a fee-only, fiduciary, CERTIFIED FINANCIAL PLANNER™professional. And yes, I’m accepting a few new families as clients this year.
If you are considering a 401(k) rollover and would like to talk about it, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.
