That's a great question that many people have when they change jobs. The answer to this question might be different for each person because of different life situations and different employer 401(k) plans. We recommend that you don’t risk going it alone when considering a rollover from your current retirement plan. Seek reputable financial and/or tax advice to help ensure that you make an informed decision based on your specific situation. Here are some things to consider as you make this decision.
Step 1 – Do some homework on your own.
a) Make sure that you can rollover your retirement plan to another plan, or an IRA
● Certain plans such as a non-governmental 457(b) Plan may limit your rollover options
● Rollovers are not allowed from any non-SIMPLE IRA to a SIMPLE IRA for individuals with those types of accounts.
● You may be forced to pay off any outstanding loans taken from your retirement plan before you can make a rollover
b) Consider whether some potential features within your current retirement plan are important to you, and may not be available if you roll over to an IRA, such as:
● Will you need to borrow from your plan? Some retirement plans may allow for loans, whereas IRAs do not.
● Will you need access to your funds early? Depending on your employment status, and the type of plan, you may be able to make penalty free withdrawals before age 59-1/2.
● Will you need to annuitize part, or all your retirement plan investments? Some plans may provide advantageous annuitization options.
● Do you plan to work past age 70-1/2? If so, you may be able to delay required minimum distributions (RMDs) for the amount held in your retirement plan, until after separating from your employer.
● Will your fees and expenses, related to the specific investment holdings in your account, increase if you execute a rollover? Fees and expenses should be carefully evaluated before deciding.
● Will the quality of financial advice and guidance improve with a rollover?
● Will you have access to more investment choices if you execute a rollover? Although more is not always better, it may be important to some people to have a greater selection of investment alternatives than what may be available within their old retirement plan.
Step 2 - Engage a qualified financial professional to help guide you through the process and consider your options, such as:
● Option # 1: Leave the money in your former employer’s retirement plan
● Option # 2: Rollover to your new employer’s plan
● Option # 3: Rollover to an IRA
Step 3 – With the help your retirement plan administrator and tax advisor, determine if there are penalties or tax consequences of any retirement plan distributions including rollovers.
Step 4 – Understand how the Required Minimum Distributions (RMD) may be affected by a rollover. For example:
● IRS rules state that an RMD should be calculated for each account separately. Then, where aggregation is allowed, those RMD amounts can be added together and the distribution can be taken in any proportion from one or more of the aggregated accounts. RMDs for one type of account can never be taken from a different type of account. For example, a 401(k) RMD cannot be taken from an IRA, and an IRA RMD cannot be taken from a 403(b).
● IRA ACCOUNTS - RMDs for multiple IRA accounts can be aggregated. This includes SEP and SIMPLE IRA accounts. The RMD should be calculated for each account separately, but after that, the RMD amounts can then be added together and taken from any one or combination of accounts.
● 403(b) ACCOUNTS - RMDs for multiple 403(b) accounts can be aggregated. A person with more than one 403(b) account can calculate the RMD for each account and then add the RMDs together. The total can then be taken from one or a combination of 403(b) accounts.
● EMPLOYER PLANS - RMDs from employer plans, not including 403(b) plans and SEP and SIMPLE IRAs, cannot be aggregated. A person with multiple 401(k), governmental 457(b) or other employer plans must calculate the RMD for each individual plan and take the corresponding RMD from that plan only.
● Working past 70½: If you don’t own 5% or more of the company you work for, it may be possible, depending on your company’s plan, to delay your first RMD under a tax-qualified retirement plan sponsored by that company until April 1 of the year after you retire, even if that’s after age 70½. This exception does not change the RMD obligation for your other retirement plans or accounts.
Step 5 - If you decide to rollover the account, ensure that you request that the assets from your employer’s plan be sent directly to the receiving account (new employer’s plan or IRA). If you receive a distribution of assets directly from your retirement plan, you have 60 days to re-deposit the assets into another qualified account; otherwise the distribution will be subject to income tax and penalties.
Finally, there is something to be said for keeping all your investments in one location. Since you need to be reviewing your investment allocation at least once per year, having them all in one place does make it simpler.
As you can see, there are multiple items to consider, however they may not all apply to your situation. Some situations may be very simple while others might be complex. Consider all these options and make the decision that is best for you. Best of luck and let us know if we can help further!!