Should You Consider a 401(k) Rollover?

Dave Becker | May 1, 2024

When you leave a job for a new opportunity, you are faced with many decisions. Not only do you need to acclimate yourself to a new phone system and what code is required for the copier, but you may have left your 401(k) at your previous employer and aren’t sure what to do with it.

As is the case with many instances in life, there is no clear “right” and “wrong” option to this decision. There are, however, several factors to consider. Before we jump into those, let me address a few additional questions you may have.

Key Considerations for Your 401(k) After Leaving Your Employer

First, your 401(k) is separate from your previous employer. So, if you didn’t leave on the best of terms or are worried about the financial stability of that company, your account is completely separate from the company. They cannot take your money and your money cannot be used to pay for debts the company may have.

Second, if your 401(k) balance is above $5,000, you will not (in most instances) be required to move your money out of the plan. You can usually leave it there as long as you’d like, even after you retire. If, however, your balance is less than $5,000, you may receive a notice from your previous employer stating that you have a certain amount of time (usually 30 days) to move the money out of the plan. If you don’t, they will mail you a check, which could be taxable.

Third, while you are no longer able to contribute to that 401(k) as long as it’s at your previous employer, you are still able to make investment changes.

Should You Leave It or Move It?

Now that we have a clear understanding of some of the basics, let’s talk about the considerations of whether to leave the money at your previous employer or move the money.

Benefits

I’ve often said a 401(k) has three main benefits:

First, it’s easy to make contributions because the money comes directly from your paycheck before you even see it.
Second, you will get a tax deduction if you’re contributing to the 401(k) in a pre-tax manner.
Finally, you will often get a match from your employer on any contributions you make.

Drawbacks

There are, however, two drawbacks I see with many 401(k) plans:

First, your investment options are more limited than they may be in other accounts. If your investment options in your old 401(k) are not very good or not as diverse as you’d like them to be, you could potentially perform better in an account that has more offerings. That, on the other hand, can cause more confusion, which brings me to the second drawback of most 401(k)s…
A lack of proactive advice. Many 401(k) plans do not have an advisor attached with them. As such, the folks on the service line for your 401(k) are unable to provide advice. They can tell you factually what a particular investment’s stated investment objective is, but cannot tell you whether you should make a switch or not. This can be very frustrating to investors, especially during downturns in the stock market. Other investment accounts may have an advisor attached to them, not only helping you navigate the ever-changing market landscape, but also helping you choose among the myriad of investment options.

Your 401(k) Options

One option you have is to roll the money to an individual retirement account (IRA). Because all the benefits of your old 401(k) are one-time in nature, moving the money to an IRA doesn’t undo any of them. On the other hand, it does open your investment options up dramatically while usually having an advisor connected to the account to help you choose. One consideration, however, is that by having an advisor attached to the account your fees will be higher than the other two options (leaving your money in your old 401(k) or rolling it to your new 401(k)). It is important to be aware of the advisor’s fee structure and compare how their accounts have performed in the past, net of fees, to other options. In general, I consider this to be the best option for clients.

Some folks decide to move their old 401(k) to their 401(k) with their current employer. This can offer the benefit of consolidation. On the other hand, your money will be locked into whatever investment options your employer chooses for that 401(k) for as long as you work there. If they make good decisions, this is not much of a drawback. If, on the other hand, they do not, you’re stuck with whatever they choose. For this reason, I consider this to be the worst of the three options.

Partner With a Professional

Needless to say, this is an important decision and one that should not be taken lightly. All three options have their benefits and drawbacks. At Keystone Wealth Management, we don’t listen to stories, we run the calculations. In this instance, that means we’d look at your current investment allocation, what options you have with your new employer, and run a performance comparison between those and how an IRA has performed.

As we often say, “Stories only pay the bills if you’re an author.” Because we are not, we rely on facts and figures instead. And as fiduciary advisors, you can have confidence that we’re looking out for what’s best for you.

If you have retirement accounts from previous employers and aren’t sure what to do, please let us know. To schedule a no-obligation meeting, please get in touch by emailing dave@keystonewealth.com or calling (319) 883-3096. I look forward to hearing from you!

About Dave

Dave Becker is owner, financial advisor, and Chartered Financial Consultant® at Keystone Wealth Management, a full-service financial advisory firm based in Waterloo, Iowa. The firm offers a wide range of financial products and services to individuals, business owners, and corporations to help them pursue their financial goals. As a fiduciary, Dave always places his clients interests above all else. He enjoys simplifying the complex and helping clients move toward their goals and ultimately financial freedom.

Dave provides clear and concise communication, something his clients highly value.

After graduating from Illinois State University in 1998, he immediately started helping others with their financial planning. In 2003, he earned the CERTIFIED FINANCIAL PLANNER™ designation (which he voluntarily resigned in February of 2023) and the Chartered Financial Consultant® designation in 2005. Over the span of his career, Dave has guided his clients through some of the most dynamic and uncharted situations for investors, including the burst of the dot-com bubble and the subsequent correction from 2000-2002, the 2008 financial crisis, a global pandemic and interest rates at 41-year highs.

Dave, his wife, Staci, and their four children (Christian, Anna, Carson, and Jonah) reside in Cedar Falls, Iowa. In addition to his work responsibilities, Dave has also volunteered at school, coached soccer and robotics, served as a trustee at church, led a Cub Scout pack, and cheered his kids on in everything they do. He has always said that he makes his best investments at home. In his limited spare time, he also enjoys watching college football and Formula 1 racing. To learn more about Dave, connect with him on LinkedIn.