Get your minds out of the marijuana plant. I’m not talking about that type of rolling. Rather, the pros and cons of rolling your old 401k/403b plans into a Rollover IRA.
Generally, I say YES, you should move money out of an old employer’s plan into a retirement account in your own name as soon as possible.
Here are the Pros:
- More investment options
- Better withdrawal capabilities (checkbooks, ACH connection to your bank account)
- The ability to choose your tax withholding (employer plans are required to withhold 20%) when you withdraw.
- The ability to pinpoint which investments to withdraw from within the account. Employer plans don’t let you choose to withdraw from, say, your stock fund. It’s a pro-rata distribution from all funds in the account when you take money out.
- Simplify, simplify, simplify!Having old employer plans scattered about is no way to effectively manage your investments. Plus, what if you die and your heirs have to find all of those accounts?
- Avoid 401k/403b administration fees.
Are there some reasons to keep money in an employer plan after you leave? Sure! I can think of three:
- In some cases the mutual fund expense ratios can be lower within an employer account because they get institutional pricing due to the high volume of investment the plan is putting with the investment company.
- Some people like a smaller menu of curated investments because it’s less overwhelming.
- MOST IMPORTANT!! If you retire between ages 55-59.5, do NOT roll the 401k/403b from the company you just left into a Rollover IRA.You can use an early withdrawal loophole called the Rule of 55, which allows you to withdraw from the company plan without the 10% early withdrawal penalty (you will still pay income tax). If you roll the plan to an IRA, you lose that early withdrawal loophole.
- After you turn 59.5, you can do the rollover. The early withdrawal loophole is no longer needed.
However, in most cases, and especially when you are done working and wanting to create a “retirement paycheck” from your accounts, consolidating all of your old work plans into one Rollover IRA is the better move.
