Should You Rollover a 401(k) into an IRA?

If you have ever left a job where you had a 401(k) you’ve asked this question. Depending on your circumstances, the answer may differ from case to case. While nothing beats advice from a professional who can evaluate your situation fully, here are some basic situations that may lead to the right decision.

Is your human resources department reliable and easy to communicate with?

This is the stickler that most people can answer with a resounding NO!

If you keep your 401(k) with a previous employer, it will typically be the human resources department at that company that you deal with whenever you want to make a change to the account. If they are approachable and easy to communicate with now, they will likely be so after you move on to your new employer.

If, however, they are hard to set an appointment with, incompetent or disinterested, or if you have burned any bridges with them, you won’t want to leave your money with them.

Are you satisfied with the options your 401(k) had?

This is different than, “Did the investments in your 401(k) do well.” Rather, you have to evaluate the different investment options available to you and determine if there will be enough variety to suit your needs in different circumstances. If you’re 27 and moving on to your second job, the stock funds you’re in may be perfectly suitable, but if the 401(k) doesn’t have adequate fixed income (bond) options, you may need to make changes as you get closer to retirement.

If the options available in your 401(k) were not adequate, it’s time to shop around for an IRA, where you’ll have more investment options.

Are you in dire need of money immediately?

Most investment advisers and financial planners do not consider this possibility, mainly because of the tax consequences and penalty, but there may be times when you need to cash in some of your 401(k). Sometimes things just don’t work out as planned.

If you find yourself suddenly unemployed, with a mortgage, car payment, rent, a family to feed (not to mention your own voracious appetite), and, to top it all off, you need a new suit for interviews, it may be appropriate to take some of that 401(k) and put it to good use until you get to that next rung on the ladder.

Obviously, it’s a last-ditch effort, and adjusting your lifestyle is the first in a long series of steps that you need to take to get back on solid financial footing. But remember, by cashing out a retirement account prematurely, you not only have to pay taxes on the proceeds, but also will be penalized 10% for the early withdrawal of funds.

If you do find yourself in this situation, do it cautiously, and make every effort to preserve as much as you can to rollover into a qualified plan once you are back on your feet, since you have 60 days from the withdrawal to rollover into an IRA.

Do you want to manage multiple accounts?
You can have as many retirement accounts as you want, but they will have different fees associated with them and different investment options available to them.

If you’re not interested in evaluating each account every six months, it may be best to consolidate your retirement savings into a single IRA or a(new employer’s) 401(k).

If you are going to rollover your funds…

The most important thing when rolling over into an IRA is to do it quickly: you have sixty days before the IRS considers it a withdrawal and, therefore, taxable and penalized.

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