Dear Dr. Don,
I just started a new job that has a 401(k) plan. I have funds in a 401(k) account with my previous employer. I am 26 years old and would like to know if I should roll over this account into the new company’s plan or just place these funds in a traditional IRA?
— Craig Contributes
You have several choices: You can keep the money invested in the previous employer’s plan, place the money in a traditional IRA account, convert the funds into a Roth IRA rollover account or place the money with your new employer’s 401(k) plan.
Many former employees aren’t comfortable with leaving the money in the old plan. You didn’t even mention that option, so either you aren’t comfortable with it or you didn’t know it was an option.
I don’t like the idea of placing the money in the new employer’s plan. I like the flexibility of deciding how you want the money invested and where you want to hold the account. Once the money goes into the new employer’s plan, you’ve lost that flexibility. The traditional IRA or Roth IRA is my recommendation for the rollover contribution.
In choosing between the two, consider rolling the money in the 401(k) account to a Roth IRA using the direct rollover option. You want the direct option so there’s no mandatory withholding. You’ll owe income tax on the rollover contribution, but if you can afford to pay the tax with monies other than the rollover funds, there’s no distribution out of the account. Thus, there’s no penalty tax on an early distribution.
I don’t know the particulars of your tax situation or your portfolio, so run this idea by your accounting professional.
If you do a Roth rollover, the money can grow from age 26 until retirement and the qualified distributions in retirement will be tax-free. That is a very attractive option that you should consider.
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