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Should a retiree roll over his 401(k)?

By Jennie L. Phipps ·
Thursday, July 29, 2010
Posted: 2 pm ET

My brother-in-law, who retired this month, called my accountant husband last night with a retirement planning question. He wanted to know whether to roll over his 401(k) into an individually managed IRA -- or leave it with his former employer.

My brother-in-law is a union member who took early retirement from a major communications corporation. His former employer is fiscally strong, there are plenty of safeguards in place and the plan has lots of investment options that he can choose from. Beyond that, what should a guy like him consider if he is faced with this decision? Here's what my husband told him:

Investment cost is the biggest consideration. Hewitt Associates, which is an employee benefits management firm, points out that large corporations have the leverage to keep fund costs very low for their 401(k) participants. Over 10 years, even a 3/10 of a percent difference between this discount rate and what you'd pay if you were invested directly through a mutual fund company, can add up to more than $1,000 on an account worth $100,000 initially. Not huge, but not chicken feed, either.

Do you have appreciated company stock? A rollover might look better in this case, especially if you aren't too far from 70, when you have to make mandatory withdrawals. If the shares are  part of a lump sum distribution in the same calendar year as you roll over the rest of your 401(k), the IRS will let you put the stock portion in a taxable account and you'll be taxed only on the amount the plan paid for the stock. This could be a small fraction of current market value and save you big tax dollars.

Flexibility. If you want to spend some of that money, you'll have to roll it over because most employee 401(k)s don't allow withdrawals.

Bankrate discusses all these issues in depth in this retirement planning story.

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