Take it or leave it
Common wisdom holds that when you leave a company, you should take your retirement account with you.
But common wisdom is sometimes wrong.
Just as group medical insurance is generally a better bargain than individual coverage, a group retirement plan can offer advantages investors can’t get if they roll the money into an IRA, says Wayne Bogosian, president of the PFE Group and co-author of “The Complete Idiot’s Guide to 401(k) Plans.”
The best retirement plan for you may be different than that for another. Before you move your account, look at the deal from all the angles.
CPA Ed Slott believes that IRAs offer “more choice, more control” for consumers than company-sponsored 401(k) plans. “In most cases, a rollover is better,” says Slott, author of “The Retirement Savings Time Bomb … and How to Defuse It.” But, he admits, there are some issues — like holding company stock, early retirement or threats of law suits — that can be game changers.
So as you pack up your Rolodex, your Koosh ball and that silver picture frame, consider leaving your 401(k) account right where it is. Here are six reasons that may make sense.
Lower fees
With an IRA, you lose the financial advantage of group buying power, says Bogosian.
Many funds come in two flavors: institutional and retail. Most individuals don’t have the required minimums to get in the former, so they must buy retail funds.
“Most 401(k), 403(b) and 457 plans have significant buying power — much more than the individual,” Bogosian says. His advice: “Look before you leap. You could be paying more for exactly the same thing.”
But be careful that you’re comparing apples to apples, says Slott. It’s often difficult to determine the fees charged by 401(k) plans.
Security and control
One big fear that investors have: If I’m no longer at the company, I no longer have control of my money. Not necessarily true. In many cases, you’ll have the same rights to select funds and reallocate your assets whether you work at the old company or not.
Check to see if your 401(k) plan gives you the same access and investment options as current employees, says Natalie Choate, author of “Life and Death Planning for Retirement Benefits.”
Also, make sure costs or fees will remain the same and compare those total costs to your IRA options.
“While you can’t contribute to the plan or take a loan, your account has all of the same investment options and fiduciary protections, whether you’re a current or former employee,” says Bogosian.
Access to stable value funds
Within an employer retirement plan, you may be able to put money into a stable value fund. These funds are not available in IRAs. So if you’re looking for a place to keep cash for your upcoming retirement, your former employer’s retirement plan could be the bucket to use, says Bogosian, “and with much higher returns than a money market fund outside the plan.”
The average return: 2.06 percent, according to June 2010 numbers from the Stable Value Investment Association, an industry group.
Favorable treatment for company stock
Is any of your 401(k) invested in company stock? Tread carefully. Here are a couple scenarios:
- You leave the plan and roll your stock into an IRA. If you choose this option, you’ll pay no tax when you move your investments into an IRA if you do a trustee-to-trustee transfer. But when you take the money out at retirement, all of it will be taxed at income tax rates (which could be nearly twice as high as capital gains rates).
- You leave the plan and roll your stock into a brokerage account, or you stay in the plan and take your lump sum distribution at retirement. In either case, you move all the company stock from your 401(k) into a non-IRA taxable account. When you pay that year’s taxes, you’ll owe income tax on the total that you actually paid for the stock. But when you take money out of the account at retirement, you’ll pay tax on your earnings at capital gains rates (typically less than the income tax rate).
Best move: Consult a knowledgeable, unbiased professional who understands “net unrealized appreciation” if your decision involves company stock, says Slott.
Protection from lawsuits
Federal law protects the money in 401(k) plans from most law suits, says Slott. But IRAs are protected by state law, “so you have to know what’s protected in your state,” he says.
If law suits, judgments or collections are a concern, a quick phone call to your attorney should let you know if your IRA is shielded from creditors and up to what amount, he says.
Earlier access to penalty-free funds
Tapping an IRA early can be cumbersome and expensive. You basically have two choices: Take the amount you want and, if you’re under age 59½, pay a 10 percent penalty plus income tax on the withdrawal. Or, set up a 72(t) distribution, which mandates regular withdrawals for at least five years, but limits the amounts to a tiny slice of your savings.
But if you are laid off or take early retirement at age 55 or after, you can tap your 401(k) without penalty, says Choate. “But that only applies to company plans.”
Retirement resources
Be sure to take full advantage of your employer’s retirement plan beginning early in your career. Bankrate offers numerous stories to help novice investors get started. After reading them, if you’re still uncertain about what to do, consult a fee-based financial adviser.
- Cash out, rollover or leave 401(k) behind
- Who gets your money after you die?
- 7 steps to a Roth IRA conversion
- Penalty-free 401(k), IRA withdrawals
