If you've worked for a few companies/employers over the years, chances are you have an old retirement plan (401k, etc) with one of them. Or maybe you recently retired. Qualified retirement plans may include 401k plans, 403b plans, 457 plans, Profit Sharing Plans, etc. For the purpose of this email, I will use the 401k name for all retirement plans since the 401k is the most common. What you should do with your old 401k plan depends on several factors. Below are a few things to consider.
First, what is a 401k Rollover?: A 401k rollover is where you take money that is in your 401k account, and you roll it over into an IRA in your name. If your money is in a regular 401k, you typically roll this money into a Traditional IRA. If your money is in a Roth 401k, you will want to roll this money into a Roth IRA. Typically, you need to be separated from service and no longer working at that employer before you are eligible to do a 401k rollover (certain exceptions apply). If you do a 401k rollover correctly, the tax-deferred benefits continue, and you don't owe taxes on the 401k rollover.
Fees and total costs: Fees and your total cost are important factors to consider. Before you roll over your old 401k plan to a financial advisor, make sure you understand the difference in total cost/expenses. Some employers pass much of the 401k cost on to the participants by using high-cost mutual funds. This makes the 401k plan rather expensive for participants (you). While other employers cover much of the 401k plan expenses themselves, giving the participants (you) access to a very low-cost 401k plan. Generally speaking, larger companies usually cover much of the expenses, while smaller companies typically pass the expenses on to the participants (you). But this is just a general rule of thumb, there are many exceptions. You may be able to determine the cost of your 401k from your statements and/or the website for the 401k plan. Or you may have to ask your employer. Ask the company/employer to provide you with a 'Participant Fee Disclosure'; this should disclose the fees associated with your 401k plan. Then, compare the costs of your 401k plan with what your costs would be in an IRA (refer to my 'Know Your Total Cost of Investing' blog post to help you determine this). If the total cost is lower with your 401k plan, you may want to leave your account in the 401k plan. If the total cost is higher with your 401k plan, then you should probably roll over your 401k account to an IRA. FYI, your total cost of investing in an IRA with me would be less than 1.10% per year. Some 401k plans have total costs that are much higher than 1.10% per year.
(Click here to see details on our Cost/Pricing)
Do you want help with your 401k? Fees and total costs aren't the only factor. You might just want help managing your money. And there is nothing wrong with that. If you don't understand investing, don't want to take the time to learn, or just don't have the time to look after your 401k account, then rolling over your 401k account to a professional financial advisor might serve you quite well. If this is the reason you decide to roll over your 401k account, just make sure your total cost of investing in an IRA with your financial advisor is fair and reasonable. Again, your total cost of investing in an IRA with me would be less than 1.10% per year.
Do you want more investment options? With a 401k account, your investment options are typically limited to a handful of mutual funds. This isn't necessarily a bad thing as most 401k's offer investment options that cover most of the major investment categories. But make sure these investment options aren't a bunch of high-cost mutual funds. With an IRA, your options are virtually unlimited. So if having more investment options is important to you OR if the investment options in your 401k are high-cost mutual funds, then you should consider rolling over your 401k to an IRA.
Ease and Simplicity: Sometimes it's just easier to manage your investments if they are all in one place. If you have several old 401k plan accounts, it can be difficult to keep up with everything. By consolidating your investments in one place, you have fewer accounts to worry about. For some, this added convenience alone might be the reason you choose to roll over your 401k to an IRA.
IRA Conversion Flexibility: Did you read my blog post titled, 'Timely IRA Conversions'? If not, check it out. Not all 401k plans have the Roth 401k option. And not all plans that do have the Roth 401k option allow for in-plan 401k conversions. So if you want to convert any of your traditional 401k money into your Roth, then you may need to roll over your old 401k plan to an IRA. Once the money is in your Traditional IRA, you have the option to move (convert) the money into your Roth IRA. And ‘Timely IRA Conversions’ might save you a significant amount on taxes over the life of your IRA(s).
(Click here to learn more about ‘Timely IRA Conversions’)
The "In-Service" Rollover Exception: Typically, you can't roll over your 401k account while you are still employed with the company that has your 401k plan. But this isn't always the case. Many plans offer what's called an "in-service" rollover. Typically, you must be a certain age (59 1/2 is the most common) before your plan will allow you to do an "in-service" rollover. If you feel like you would benefit from doing a 401k rollover, based on the factors discussed in this email, then ask your employer if your 401k plan allows for "in-service" rollovers. If your 401k plan allows for "in-service" rollovers, ask how it works and what it takes to qualify. FYI, even if you do an "in-service" rollover, you can still continue contributing to your 401k plan even after your "in-service" 401k rollover is complete.
So when should you NOT roll over your old 401k plan to an IRA? Consider all the factors I mentioned above. If you would NOT benefit from one or more of these factors, then you should probably NOT roll over your old 401k. Also, if you are using the ‘Backdoor Roth IRA Strategy’ to get money into your Roth IRA each year, you may not want to roll over your old 401k unless you plan to convert and pay taxes on the full amount as this will complicate the issue. Make sure you consult with your financial advisor and/or tax advisor before you roll over your old 401k plan.
HyLine Bottom Line: With old retirement plan accounts (401k, etc), consider several factors before you roll over your 401k account to an IRA. For some, there are many reasons to roll over your 401k to an IRA. For others, you might want to leave your 401k where it's at.
What can I do at HyLine Wealth to help you with an old retirement plan (401k, etc)? First, I can help you decide if a 401k rollover is right for you. If you decide to do a 401k rollover, I will help you with the entire rollover process…from start to finish. Once the 401k rollover process is complete, I will help you take advantage of the benefits of having this money in an IRA. You will have access to low cost index funds (Click here to learn more). If it makes sense, I will help you with ‘Timely IRA Conversions’. I can also help you “buy the dips” like I discuss in my 'Embrace Volatility & Make It Your Best Friend' blog post. And I will do all this at a fair and reasonable price.
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Questions? Don’t hesitate to reach out. If you have questions on anything, feel free to email me at firstname.lastname@example.org or call me at (605) 275-2343.
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5809 S Remington Place, Suite 101
Sioux Falls, SD 57108
Office (605) 275-2343
Location-Independent: Pretty much wherever you are located, we can work together. I am registered in the state of South Dakota and have an office in Sioux Falls. The “de minimis exemption” allows me to do business in most other states (with only a few exceptions). I consider myself "location-independent" as I use a heavy dose of technology to communicate and serve you. This includes screen sharing technology, electronic signatures when possible, and shared client portals so we can view the same information at the same time. Frankly, I can probably offer you better service than your "local" financial advisor.
HyLine Wealth is an investment adviser registered in the State of South Dakota. We do not provide tax or legal advice. Past performance is no guarantee of future results. Always consult your financial advisor, tax advisor, attorney, and/or insurance agent before implementing any specific strategy to make sure it is right for you and your unique situation. We are not responsible for the accuracy or upkeep of information on the links we provide to outside websites. If/when we provide a link to an outside website, be sure to independently confirm the accuracy of any information.