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Employers have been giving us lots of opportunities to make this decision of late: when leaving an employer, whether voluntarily or otherwise, we have the opportunity to rollover the qualified retirement plan (QRP) such as a 401(k) from the former employer to either an IRA or a new employer\u2019s QRP.<\/p>\n
This decision shouldn\u2019t be taken lightly \u2013 although it may be the best option for you. Moving to an IRA gives you much more control over your destiny, so to speak, by allowing you to choose from the entire universe of allowable investment choices, rather than a limited menu of investments in a 401(k) plan. Using your new employer\u2019s QRP can give you a better sense of control over the account as well, although the flexibility of an IRA is generally preferable to another QRP.<\/p>\n
But sometimes it makes the most sense to leave your money in the old plan. Listed below are eight possible reasons that you might want to do just that.<\/p>\n
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- If you are happy with your former employer\u2019s plan, consider it well-managed, low cost, and possibly with some investment options that are not readily available (such as desirable mutual funds that are closed to new investors), you may want to leave your money in the plan. This would be especially beneficial if you don\u2019t have another employer plan to roll over into, or you are inexperienced (and squeamish) about establishing your own IRA.<\/li>\n
- If you have commingled deductible and non-deducted IRA contributions in your outside IRA accounts, having an active 401(k) plan can help you to \u201cseparate\u201d the deductible IRA assets from the non-deducted. See this article<\/a> for more information. Essentially this benefit gives you a way to bypass the \u201clittle bit pregnant\u201d rule wherein the IRS treats all IRA funds pro-rata taxable and non-taxable when making distributions\u2026 a common issue when doing a Roth IRA conversion. If you don\u2019t have an active 401(k) plan available, this option is lost.<\/li>\n
- If you have an investment in your former employer\u2019s stock in your 401(k), you need to consider the ramifications of utilizing the Net Unrealized Appreciation (NUA) option<\/a> \u2013 before doing a rollover. The point is, if you\u2019ve taken even a partial rollover of your 401(k) in a prior<\/span> year, the NUA treatment is no longer available to you.<\/li>\n
- If you think you may be returning to this employer, it might make sense to leave your funds where they are. This is especially true for government employers with section 457 plans \u2013 due to the nature of these plans\u2019 ability to provide you with retirement income without penalty much earlier than an IRA or a 401(k) plan could. With the vagaries of governmental policy changes, if you\u2019ve withdrawn and closed your account and come back to work for the same agency, the old plan may no longer be available to you since you\u2019re now a \u201cnew\u201d participant.<\/li>\n
- If you\u2019re in the year when you\u2019ll reach age 55 or older, maintaining the 401(k) plan gives you an option to begin taking distributions prior to age 59\u00bd without penalty. If you move these funds over to an IRA this option is lost. It\u2019s also lost (at least temporarily, while you\u2019re employed by the new employer) if you rollover the old 401(k) plan to a new employer\u2019s 401(k) plan.<\/li>\n
- On the off-chance that you might need a loan from your retirement funds, you should know that IRAs do not have this provision. Retain at least some balance in the plan if you might need this option \u2013 but also you should check with your plan administrator to see if this option is available for non-employee plan participants, because it might not be (and actually, it likely is not). But keeping in mind #4, if you\u2019ve maintained a healthy balance in the plan and you return to work with this same employer, you\u2019d have a much larger account to work with if you needed to borrow.<\/li>\n
- Funds in a 401(k) account are protected by ERISA \u2013 and as such are generally not available to creditors. Depending upon the state you live in, IRA assets may be available to your creditors in the event of a bankruptcy. At any rate, ERISA protection is pretty much an absolute, so this is yet another reason you might consider leaving funds in a former employer\u2019s 401(k) plan. Funds moved from an ERISA-protected account can carry the protection on, but new contributions to the account do not.<\/li>\n
- Take your after-tax contributions out first, if your plan happens to include these. If you\u2019ve made after-tax contributions, as some plans allow, it makes sense to separate these contributions from the pre-taxed amounts. You can convert these contributions directly over to a Roth IRA in most cases, tax free. This is because the 401(k) isn\u2019t subject to the \u201clittle bit pregnant\u201d rule (pro rata distributions) alluded to earlier. Once you\u2019ve removed the after-tax contributions and put them into a Roth IRA, you can then rollover the rest of your 401(k) if it makes sense.<\/li>\n<\/ol>\n
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- If you have an investment in your former employer\u2019s stock in your 401(k), you need to consider the ramifications of utilizing the Net Unrealized Appreciation (NUA) option<\/a> \u2013 before doing a rollover. The point is, if you\u2019ve taken even a partial rollover of your 401(k) in a prior<\/span> year, the NUA treatment is no longer available to you.<\/li>\n