Should I Rollover My Old 401(k)?
On average Millennials are changing jobs about every 3 years or so.
Because of this we're seeing a lot of "orphaned" 401(k)s that are forgotten, neglected, & disregarded.
One of the questions I get most is, “Should I rollover my old 401(k)”? So I’m going to dive into the options that you have with an old 401(k) and the reasons you may want to consider each.
Regardless of what you choose, making a plan for an old 401(k) is important in order to optimize that money.
What is a rollover?
A rollover is the process of moving funds from one eligible retirement plan to another (e.g. 401k to 401k or 401k to IRA).
What are my options for my old 401(k)?
If you have an old 401(k) you have 3 main options. Those options are:
Leave your 401(k) where it's at
Roll your 401(k) into a new 401(k) plan (if permitted by the new 401k plan)
Roll your 401(k) into an IRA
The best option to choose will depend on a host of factors.
Leaving your 401(k) where it's at
This happens the most because it's the default option if you do nothing, which most people do.
This is likely the least favorable option of the three because many plans will pass on administrative costs & fees to former employees that they had been previously covering.
However, if the plan isn't passing on fees AND offers great investment options (e.g. low-cost index funds, international funds, fixed income options) then it could be a great way to keep your money in an ERISA-qualified plan.
The Employee Retirement Income Security Act (ERISA) created standardized protections for retirement accounts.
Savers benefit from the following protections on their qualified plans:
• protection against creditors
• protection against bankruptcy proceedings
• protection against civil and criminal judgements
Claims can't even be filed for assets held in ERISA qualified accounts. This makes ERISA accounts the gold standard for retirement assets.
Most employer-sponsored plans fall under ERISA.
On another note, many plans can auto close your 401(k) & disburse a check to you if it's under $1,000.
If your 401(k) balance is more than $1,000 but less than $5,000 then they can automatically roll over your 401(k) to an IRA of their choosing without your consent.
If you do choose to leave your 401(k) where it’s at you’ll just want to keep an eye on it and review it a couple times a year to ensure it’s still invested properly.
Rolling your 401(k) into a new 401(k) plan
The second option that you have is to roll your 401(k) into your new 401(k) plan.
This can only be done if your new 401(k) plan allows it. You'll need to reference the plan docs to be sure.
You'll also want to ensure that the new plan is ERISA qualified in order to maintain your protection.
Here are some reasons to consider this approach:
• Consolidate accounts
• Simplify investing
• Better/quality investments
• Maintain ERISA protected money
• Avoid the pro rata rule for backdoor Roth IRAs
A reason to not pursue this option is if there are poor and/or expensive investment options in your new 401(k) plan. If this is the case then it could make sense to leave it put or consider the next option.
Roll your 401(k) into an IRA
The third and final option is to roll your old 401(k) into an IRA. This also happens to be the 2nd most popular option because many people believe they HAVE to rollover their old 401(k). However, they don't need to unless they have less than $5,000 in the plan.
This approach offers more freedom and flexibility which many enjoy.
With an IRA, you can choose from a wider selection of investments that aren't offered within a 401(k).
You can also convert to Roth money a lot easier if you desire. Not all 401(k) plans offer in plan Roth conversions.
You can even have an advisor manage the IRA, for a fee, if you're looking for professional help and advice.
Some individuals will even opt to set up a self-directed IRA in which they have additional investment options, such as real estate, available.
If you do pursue this option, be sure to roll the 401(k) into a "rollover IRA" to preserve it's ERISA protection. This also helps if you ever want to roll it back to a 401(k) (e.g. to avoid the pro rata rule for backdoor Roth IRAs).
These are your 3 options when it comes to an old 401(k). It's important to know & understand the pros and cons so you can have a plan for the next time you part with you job.
