It is a new chapter and new year, usually with resolutions. One of them could be that you have had enough of your current job, boss and colleagues and want to move to newer pastures.
But what about your company 401(k), where you have diligently stashed away $19,000 every year if you are under 50 years old, or $25,000 if you are over 50? Should you keep it at your employer or move it to a self-managed or adviser-managed IRA?
I have come across many people in the Bay Area who are not familiar with the process, despite having moved companies in their careers. It is important to have a basic understanding, as the tax implications, among other consequences, are significant.
Rollovers vs. distributions
This is an important distinction. A rollover, or direct transfer, is when your 401(k) funds are rolled over into a self-managed IRA or an adviser-managed IRA. Your company’s (or former company’s) 401(k) custodian either will wire directly or make a check payable to the financial institution of your choice with “FBO (For the Benefit Of) (your name)” to the specified IRA account. This is also called a trustee-to-trustee transfer. In this case, there is no tax implication as it is rolling over from one qualified plan (401(k)) to another (IRA).
If you elect to get a distribution in your name, then that is a taxable event. 401(k)s and IRAs are taxed at regular income-tax rates. There is a 60-day period when you may be able to avoid the penalty by depositing in an IRA. But if you are not looking to take money out and/or pay taxes for that distribution, then the rollover above is a cleaner approach.
Things to consider
• IRAs offer many more investment options compared to the limited choices in the 401(k).
• IRAs offer potentially lower fees. If you are managing your IRA yourself and choosing lower-cost mutual funds and exchange-traded funds, you may be saving more. Generally, 401(k) plan costs are not the most transparent and may need more digging by the employee to get a good estimate. Note: For a better understanding, please see my April 25, 2018, Town Crier column, “Deciphering your 401(k) plan costs.”
• If your previous company goes bankrupt, you will need to make many more phone calls and engage in correspondence to get your money out. While your 401(k) may be safe, it is an added aggravation to get your own money out. In an IRA, you control your own funds and can move it quickly between firms and between advisers if need be.
• In case of bankruptcy or lawsuits, 401(k)s are subject to protection from creditors by federal law. IRAs may also be shielded, but it depends on state laws.
This article is for educational purposes only and should not be considered financial advice.