Rollover Basics
A frequently used word in the Investment world is “Rollover”. Sounds simple, but what does that actually mean?
A Rollover is the transfer of an investment from an employer sponsored retirement plan (401(k), 403(b), etc.) to an individual retirement account (IRA). PublishAn IRA opened by Rolling funds from an an employer sponsored plan (ESP) is also called an IRA Rollover.
*Note - for purposes of this blog post we will only be considering Pre-Tax investments into ESPs and IRAs. There are other considerations for After-Tax investments into ESPs and Roth IRAs.
So…..should you Rollover your account?
Before we get to should you Rollover, the first question to ask is can you Rollover, and that depends on each ESP’s specific rules. You may want to ask your Human Resource representative what is permissible in your plan or call the plan provider.
You can almost certainly Rollover if:
-You are no longer employed by the company sponsoring your ESP.
You might be able to Rollover if:
-You are aged 59.5 years old – many ESPs allow this
-You are under 59.5 years old but the plan allows “in service withdrawals” – this is not common but some ESP’s do allow this
Ok then so let’s circle back to should you Rollover? Each scenario is unique to each individual of course but here are your 4 options and some general pros and cons of each:
Option 1 – Leave in the ESP.
Pros
- Investment Costs/Fees could be lower than if you Rollover.
- It’s simple, you don’t have to do anything to leave it there.
Cons
- You may be forced out if you have a low balance.
- Investment Costs/Fees sometimes increase if you are no longer employed.
- Investment options are limited to those chosen by plan administrators.
- You may not have a relationship with an advisor to help you manage the assets.
Option 2 – Transfer to your new ESP (if you have one).
Pros
- Consolidates accounts for simplicity.
- Investment Costs/Fees could be lower than if you Rollover.
- There are no tax consequences to transfer to your new ESP.
Cons
- Investment options are limited to those chosen by plan administrators.
- You may not have a relationship with an advisor to help you manage the assets.
Option 3 – Cash out.
It is almost never a good idea to do this as it relates to your retirement goals
Pros
- Immediate access to your money.
Cons
- If you withdrawal from your pre-tax ESP and do not reinvest into a retirement plan within a short time period, the entire withdrawal will be taxable to you as income in the current year.
- In addition to the entire amount becoming taxable, if you are under 59.5 years old and cash out your ESP, you could be subject to a 10% early withdrawal penalty. There are several exceptions to this penalty.
Option 4 – Rollover to an IRA.
Pro’s
- You may be able to more easily work with an advisor to help you manage the assets.
- You have many more investment options than a typical ESP.
- There are no tax consequences to perform a rollover.
Con’s
- Investment Costs/Fees are likely higher than in your ESP if you work with an advisor.
- If you rollover and manage the assets yourself you assume all investment selection risk.
Hope this helps and of course if you have any questions about your situation, please reach out!
Till next time!
This is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. This information does not constitute tax or legal advice. Please contact your financial, tax and legal advisors about your particular situation. (11/20)