According to a Bankrate survey, 55% of people in the workforce said they’re likely to look for a new job in the next year.¹ That’s a lot of people who’ll soon need to decide about their retirement plans. When you leave a job, you’re entitled to a distribution of your retirement account funds, which includes your own contributions, employer contributions that have satisfied your plan’s vesting schedule and any investment earnings on those amounts. What should you do with the funds? Should you let them stay put, do a 401K rollover to your new employer’s 401K or similar plan, or roll them into an Individual Retirement Account (IRA)?

There’s no right or wrong answer to this question. You’ll want to weigh all the factors and decide based on your own needs and priorities. It’s helpful to have a financial professional assist you with this since the decision you make can have consequences — both now and in the future. Consider the following when you’re deciding how to proceed with a potential rollover of funds.

Benefits of 401K rollover to an IRA:

• Choice: You generally have more investment choices with an IRA than with an employer’s 401K plan. Employer-sponsored plans generally offer a limited menu of investments (usually mutual funds or target-date funds) from which to choose.
• Freedom: You can freely allocate your IRA dollars among different IRA trustees/custodians. This gives you the flexibility to change trustees often if you are dissatisfied with investment performance or customer service. It can also allow you to have IRA accounts with more than one institution for added diversification.
• Flexibility: An IRA may give you more flexibility with distributions. Your distribution options in a 401K plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions are generally at your discretion (until you reach age 72 and must start taking required minimum distributions in the case of a traditional IRA).
• After-tax options: You can roll over (essentially “convert”) your 401K plan distribution to a Roth IRA. You’ll generally have to pay taxes on the amount you roll over (minus any after-tax contributions you’ve made), but any qualified distributions from the Roth IRA in the future will be tax-free.

Interested in an IRA? Learn more.

Benefits of 401K rollover to your new employer’s 401K plan, or staying in your current plan:

• Loan provisions: Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over, if you need the money. You can’t borrow from an IRA — you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties.²
• Greater creditor protection: Employer retirement plans generally provide greater creditor protection than IRAs. Most 401K plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you’ve declared bankruptcy. In contrast, any amounts you roll over to an IRA are generally only protected under federal law if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will usually depend on the laws of your state.³
• Postpone minimum distributions: You may be able to postpone required minimum distributions. For traditional IRAs, these distributions must begin by April 1 following the year you reach age 72. However, if you work past that age and are still participating in your employer’s 401K plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.)
• Options for your Roth contributions: If your distribution includes Roth 401K contributions and earnings, you can avoid creating a new five-year holding period by rolling into your new employer’s Roth 401K plan (if it accepts rollovers). This may enable you to receive tax-free qualified distributions sooner. In contrast, rolling the funds into a new Roth IRA would initiate a new five-year holding period, so you’d have to wait to take distributions.

When evaluating whether to initiate a rollover always be sure to:

1. Ask about possible surrender charges that may be imposed by your employer plan or new surrender charges that your IRA may impose.
2. Compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any).
3. Understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

Questions? Contact a CFS Financial Advisor.

Grow has contracted with CUSO Financial Services, L.P. (CFS) to provide investment services, and your CFS Financial Advisor will help you build a plan that meets your needs. The advisor will look at your current spending, saving and investing, learn about your goals and priorities, make objective recommendations and support your efforts moving forward through the implementation and management of your plan.

SCHEDULE A COMPLIMENTARY CONSULTATION

¹August 2021 Job Seeker Survey. Bankrate. https://www.bankrate.com/personal-finance/job-seekers-survey-august-2021/. Accessed January 24, 2022. ²You can give yourself a short-term loan from an IRA by taking a distribution, and then rolling the dollars back to an IRA within 60 days; however, this move is permitted only once in any 12-month time period. ³If you are concerned about asset protection, be sure to seek the assistance of a qualified professional.

Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members. For specific tax advice, please consult a qualified tax professional. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.

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Posted In:

• Investment Education
• Retirement Planning