5 Reasons to Roll Over 401(k) Assets When Leaving Your Job

Whether the move is initiated by you or the company where you work, leaving your job can bring about many different emotions and questions. In due time, you’ll be taking on a new challenge that will demand much of your time and energy. However, you may not want to rush into putting your previous job behind you to  focus solely on the next step of your career path. A change in employers may also have financial implications to address.

When leaving a job where you hold a 401(k) account, you have a few options available to you. It may be the case that you need to decide whether to leave the assets at your former company (assuming that’s an option) or move them into a new employers plan, a rollover IRA (individual retirement account) or a Roth IRA. We believe investors may want to consider the following five reasons for moving their retirement assets into a new IRA or Roth IRA account.

1. Enhanced investment choices

When you leave a job, you may open a rollover IRA, which is an account that allows for the transfer of assets from a former employer-sponsored retirement account to a traditional IRA. The usual primary purpose of a rollover IRA is to maintain the tax-deferred status of those assets.  If you have a Roth 401(k) at your employer, you can open a Roth IRA to transfer those assets into a similar tax structured vehicle.

When companies set up 401(k) plans, they often limit the investment options available to participants. Rollover IRAs and Roth IRAs, in contrast, generally provide a wider investment menu consisting not only of mutual funds, but also exchange-traded funds, private investments, and individual stocks and bonds. This wider array of options can allow you to better control and customize your portfolio with the goal of aligning your investments to your long-term financial needs, risk profile and retirement objectives.

2. Potentially lower fees

Participants in company-sponsored 401(k) plans often pay administrative fees associated with the plan. In addition, the investment options offered by the plan may have higher fees than those available through the investment menu offered with a rollover IRA or Roth IRA. It’s important to carefully research all fees associated with rolling over your 401(k) to an IRA or Roth IRA, as they could be higher than those related to keeping your 401(k) with your former employer. 

3. Easier to manage your investments

Maintaining a diversified portfolio across asset classes can be a prudent way to help meet your long-term risk/return objectives. Being unduly concentrated in one or two market segments may lead to greater risks and lower performance over time. However, it can be challenging to clearly understand how your asset allocation looks across all your investment accounts, particularly if you have multiple 401(k) accounts with different employers. In contrast, consolidating your retirement accounts in one place can make it easier to monitor and adjust (when required) your overall asset allocation as you near retirement and your financial needs change.

4. Benefits for your estate

An unfortunately common issue that seems to arise is that the beneficiary designations on 401(k) accounts do not align with the participant’s intentions. Because these designations are typically set up when an employee first joins the company, it’s common for participants to neglect making necessary updates. In addition, when an employer changes the 401(k) plan administrator, the beneficiary designations don’t always port over to the new plan.  This can cause unintended payout consequences upon the death of the 401(k) owner.  An IRA may offer more visibility and flexibility to structuring a beneficiary designation, such as naming a trust or designating per stirpes vs. per capita payout modes. Be sure to review your beneficiary designations with your estate attorney to confirm that the exact language that your attorney advises aligns with your estate plan.

5. Greater flexibility to convert pre-tax IRA dollars to a  Roth IRA

Although some retirement plans allow for in-plan Roth conversions, it is not uncommon that this ability is limited or restricted within a 401(k) plan. When you transfer your retirement assets into a rollover IRA, there are no administrative restrictions around converting pre-tax assets to a Roth IRA. With a Roth IRA conversion, you pay taxes on the money you convert, but you can avoid paying taxes when you withdraw the money, unlike a traditional IRA. (Certain requirements must be met for the full account value to be withdrawn tax free including having the Roth IRA open for at least 5 years and attaining the age of 59 ½+). In addition, with a Roth IRA you’re not subject to required minimum distributions (RMDs) during your lifetime. Importantly, when converting your rollover IRA to a Roth IRA, there are several tax-mitigation strategies that should be discussed with your tax advisor before you take any action.

Final thoughts

Rolling over your 401(k) into an IRA or Roth IRA can be a strategic move with the potential for greater control, lower costs, and more flexibility in how your assets are managed and eventually passed on. While not the right solution for everyone, a rollover may simplify your retirement landscape and open the door to powerful tax-planning opportunities, including Roth conversions. Before making a move, talk to your Corient Wealth Advisor to ensure the decision aligns with your broader financial goals and circumstances.

Sources:
Roth IRAs | Internal Revenue Service
401(k) plan qualification requirements | Internal Revenue Service

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