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There are plenty of reasons why rolling retirement assets from one account to another makes sense, but there are also plenty of questions to ask and answer before making that decision.
Investors may decide to move money from one retirement plan to another because they’re switching jobs, or because they found a better investment opportunity in another account. Some retirees might want to consolidate their retirement assets, while others may be attempting to diversify the tax component of their savings by moving a portion of their funds into a Roth account.
Retirement tip of the week: Wondering if you should roll over an old 401(k) plan or merge a few different retirement accounts? Before you do anything, think about the tax implications, the fees, the types of investments available and when you’ll need the money.
Rollovers are neither right nor wrong by themselves. The decision to roll assets over should be made on a case-by-case basis. For example, some people might want to leave the money in their former employer’s plan because of the investment strategy available there, said Carl Holubowich, a certified financial planner and a principal of advisory firm Armstrong, Fleming and Moore, Inc. They might also be ready to retire, and want to use the money soon.
See: This simple strategy can help you make some important decisions about retirement
How to roll over your retirement plan
If a rollover is the preferred choice, the first step is in finding an eligible and appropriate account for your retirement savings. For example, a traditional 401(k) can be moved to a traditional individual retirement account, which is also funded with pretax dollars. That money could also be moved to a Roth IRA, which would technically be a conversion (and thus, taxes would be owed). On the other hand, an individual would not want to move any after-tax dollars in a 401(k) to a Roth account because they’d then be paying tax on the money twice, said Tammy Wener, a certified financial planner and co-founder of RW Financial Planning.
Make sure you request the proper type of rollover, known as a “direct transfer,” where the balance moves from the former account to the new one directly. Individuals can also do a non-direct rollover, where they receive a check for the distribution, but the Internal Revenue Service will withhold 20% of the money. This can be a dangerous move — if the rollover is not conducted within 60 days from the date of distribution, those funds could be subject to taxes and penalties.
“It gets complex real quick if you don’t do a direct rollover,” said Matthew Saneholtz, a certified financial planner and co-owner of Tobias Financial Advisors. “Always do a direct rollover unless there is a special circumstance.”
Don’t miss: Have a question about your retirement? Check out MarketWatch’s “Help Me Retire” column
What to look out for
In some instances, taxpayers may want to think twice before pursuing a rollover. People retiring in the year they turn 55 or later might want to keep those funds in their 401(k) if it will be used as their primary source of income because they’ll avoid the 10% early distribution penalty they’d face prior to age 55 or in an IRA (where they’d have to wait until 59 1/2 years old), said Brian Schmehil, director of wealth management for The Mather Group.
Also look out for the fees associated with the former and future account, such as management fees and what the investments themselves cost.
If the worker held employer stock in his or her retirement account, they should work with a financial professional who understands the rules around transferring or selling those assets to avoid a hefty tax bill, Wener said.
Also see: How to find your lost 401(k) and other retirement accounts
Investing the assets
Once the money has been moved over, it’s imperative to invest the account properly. The transfer will be made in cash, so whatever investments the worker was holding in the previous plan will not transfer over, said Joel Cundick, a certified financial planner at Savant Wealth Management. The investment choices may not be the same as in the previous account, or if you move it into an IRA for example, there may be more options.
“More choices can mean greater difficulty in choosing what to invest in,” Cundick said. “Make sure you have a plan for yourself of how you want to invest the funds.”
Rollovers are great for consolidating retirement accounts, but “plan with purpose,” Cundick said. One major benefit with consolidating is that it’s less likely the individual will forget about a long-lost account, but they might want to consult a financial adviser who can provide appropriate recommendations for how the money is invested and later distributed.
“If you don’t have a clear idea in mind of what you are trying to accomplish, you can end up making poor decisions in that consolidated account,” Cundick said.
Want more actionable tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column
