401(k) or IRA Rollover: Which Is Best for You When You Change Jobs?
Here are four key factors to consider.
Enough time has passed that songs from the 1980s are now categorized as "classics" or even "oldies." One in particular by The Clash centers around a question many investors have to ask themselves about their 401(k) accounts when they change jobs: Should I stay, or should I go? In other words, should funds stay in a 401(k) account, or roll over to an individual retirement account?
Well, it depends. While it may make sense for some investors to keep their account balance in a 401(k) account, other investors could be better served by rolling their balance to an IRA. A comprehensive plan that encompasses investments, taxes and cash flows will dictate which option is best. While each case is specific to the individual, let's look at the factors that could tilt the decision in favor of an IRA rollover.
If a 401(k) plan has costly fees, investors may consider rolling the balance to an IRA. As a general rule, 401(k) plans benefit from economies of scale. Large plans often have relatively low fees, while small plans often have higher fees. Those costs could be paid at the plan level (by participants), at the company level or split between the two. It is best to know what the fees are and who collects them, if you want to keep your balance in a 401(k) plan.
Withdrawal Options and Liquidation
A 401(k) plan has a governing document that sets rules for when and how participants can take distributions from their accounts, among other things. A plan document may limit participants to a number of annual withdrawals or may prevent partial lump sum distributions. Some plan documents only allow for systematic (say, monthly or quarterly) withdrawals. IRAs, on the other hand, do not have these sorts of limitations.
Additionally, the company sponsoring the 401(k) sets the plan rules. If a company changes the plan document to exclude former employees, a participant is forced to roll their account to an IRA or other retirement account at a time when market fluctuations might make it less than ideal to do so.
Investors can benefit from their adviser's ability to take action in a timely manner. With assets held in a 401(k) an adviser can only make recommendations for action. The adviser can't execute trades. The result can be that trading, rebalancing and re-allocation are not executed in a timely manner. An IRA rollover can hasten more optimal execution by an adviser that could lead to greater wealth accretion over time.
Investment Choices and Asset Location
A 401(k) plan generally has an investment menu that limits participants to the options available through the plan. An investor's ideal allocation may call for asset classes that are simply not offered through a 401(k) plan.
Another consideration is what's called asset location—creating the most tax-efficient location of stocks and bonds in different accounts based on the tax treatment of the accounts. Depending on a 401(k) plan's investment options, an investor may be left with less attractive asset location options if funds remain in a 401(k) plan.
Certainly, there is a lot to account for when deciding what to do with a 401(k) held with a former employer, which is why it makes sense to evaluate your own situation, your goals and retirement plan.
A licensed attorney, Jared Snider serves as a senior wealth adviser at Exencial Wealth Advisors in Oklahoma City. He strives to help individuals and families attain their goals, manage risk and cultivate peace of mind.
About the Author
Jared Snider, J.D., Investment Adviser
Senior Wealth Advisor, Exencial Wealth Advisors
Jared Snider is a licensed attorney and serves as a senior wealth adviser at Exencial Wealth Advisors in Oklahoma City. He guides families, business owners and professionals in goal-based investing, planning and risk management. By creating solutions with clear action steps and follow-through, he strives to create peace of mind and confidence for his clients. Snider earned his Juris Doctor with highest honors from The University of Tulsa College of Law. Prior to joining Exencial, he practiced estate planning and real estate law. He is a member of Exencial's Investment Committee.