When should you consider a Rollover?

A rollover of your retirement plan accounts to an IRA or Roth IRA comes with many factors and considerations.

What is a Rollover:

A rollover occurs when you move funds from one tax-advantaged retirement account, such as a 401(k) or 403(b), into another eligible plan or an Individual Retirement Account (IRA).  Typically when conducting a rollover to an IRA one may use a Traditional or Rollover IRA. 

This process allows you to maintain the tax-deferred status of your savings while avoiding immediate taxes or early withdrawal penalties.  The below table lists the primary options available when at this pivotal decision point:

Option	Primary Benefit(s)	Key Drawback(s)
Stay in Old Plan	Maintains familiar investments and often has strong ERISA creditor protection compared to IRA.	Cannot make new contributions and may have limited distribution options.
Roll to New 401(k) if still working.	Account consolidation and potential access to new features like 401(k) loans.	Limited to the new plan’s specific investment menu; may have a waiting period.  Nominal Transfer fees would apply.
Roll to an IRA	Maximum investment flexibility and better control over distributions (e.g., QCDs).	Generally has less creditor protection than a 401(k) outside of bankruptcy.  Nominal Transfer fees would apply.
Cash Out	Immediate access to funds for current needs.	Subject to immediate income taxes and a potential 10% early withdrawal penalty.  This is the least common path and usually not optimal route.

What are the Benefits of doing one?

1. The biggest benefit is account consolidation and easier tracking of your investments.

2. Your new 401(k) plan may have features such as Roth or after tax contributions, better funds, or another benefit your old one doesn’t have.

3. For retirees, a rollover to an IRA might allow for better ability to complete tax beneficial annual tasks like Roth Conversions, Qualified Charitable Distributions, and eventually Required Minimum Distributions.

4. You can avoid a mandatory 20% withdrawal federal tax requirement by withdrawing from your Rollover IRA / Traditional IRA vs a 401k.

5. In many cases, you can pay less fees and avoid administrative fees, but not always.

When shouldn’t you complete a rollover?

There are a few scenarios where it may not make sense to complete a rollover.

1. Your old plan has lower fees than your new one.

2. You may not be eligible for a rollover yet or to start your new plan.

3. You may find that your new employer uses the same firm or custodian as your previous one, which might make a rollover less urgent.

4. The age of 55 Rule for retirees is another reason to not conduct a rollover.  If a user leaves their job in or after the year they turn 55, they can often take penalty-free withdrawals from that specific 401(k). If they roll that money into an IRA, they must generally wait until 59½ to access it penalty-free.

5. 401(k) plans generally have stronger federal creditor protection under ERISA than IRAs do. For individuals in high-liability professions, staying in a 401(k) (even an old one) can be a better legal safeguard than moving money to an IRA, although this is an uncommon reason for not completing a rollover.  

How do I complete a rollover?

1. Contact your current employer’s 401(k) provider.  Many times they will be very open to help you move monies into accounts held by their own firm.  

2. Contact your former 401(k) provider to request rollover.  Be prepared to provide identifying information, text verification, and potentially going through some wait times.  

3. Complete any paperwork or requirements they request as needed.  Submit this paperwork via the requested method from your old 401(k) provider.  If submitting via mail ensure you retain a copy.  

4. Confirm rollover is in process.

5. Ensure your new account receives the funds / you send check to your new account provider.

6. If transferring into a Traditional / Rollover IRA YOU are responsible for investing the funds.  Ensure this happens upon arrival of the funds!

For retirees completing a rollover, you would consider opening and establishing a Rollover IRA, then using that to house your assets.  Your situation may differ, and it can be beneficial to speak with your advisor or CPA prior to doing this!

Best practices and other thoughts for completing a rollover:

1. Always verify the tax breakdown of your assets in your previous accounts to ensure you do not trigger an unintended taxable event from moving money that has Not been taxed to an account that is tax-free (Roth IRA).

2. If working with an investment advisor, confirm any fees that they would receive as part of conducting the rollover.  If the advisor is managing your accounts or new 401(k), they may receive higher fees as a result of increasing the account size IF they are under a ‘percentage of assets managed’ setup.  

3. Aim to have the delivering firm send funds directly to your new 401(k) provider.

4. If doing an indirect rollover, ensure funds are invested in your new 401(k) account by 60 days to avoid unwarranted taxation.  Note that some employers may withhold 20% when doing an indirect rollover.  

5. Have your account information, phone, and identifying information present when initiating rollover via phone.

6. Patience is key here.  Some firms are easier to work with than others.  

7. Sometimes, uncommon rollover situations below may warrant a further discussion with an advisor:

   1. Rolling over an ESOP to a new retirement plan

   2. Conducting a Reverse Rollover to a 401(k) plan

   3. Conducting a rollover of a 403(b), 457, or Thrift Savings Plan.

   4. If the old 401(k) plan or retirement plan has unique assets or highly appreciated stock.

Conclusion:

While rolling over your retirement assets offers significant benefits in organization and investment choice, it is not a "one size fits all" decision. Because your tax situation and long-term goals are unique, consulting with a financial advisor or CPA is recommended to ensure you avoid unintended tax events.

This area is one of the most common planning areas we help retirees navigate, and individuals changing jobs, and we meet with individuals frequently to help assess and pinpoint blind spots before conducting a rollover.    

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This content is provided for educational purposes and should not be construed as specific investment, legal, or tax advice.  Always consult with a qualified tax professional or financial advisor regarding your specific circumstances before making a rollover decision.

Jake Stalder is a CFP® with Navigate Financial Planning LLC, located in Iowa, but working with clients virtually anywhere in the US.    Schedule a brief introductory call here to discuss your specific rollover options.