Roll It Over Or Leave It Be? The 401(K) Question

What to do with a retirement account when you leave a job

An actual movie that clearly we all need to see

Friday’s inspiring story of my finding $11,300 in a coat pocket got a couple of people asking good questions about what to do with their retirement accounts from old jobs. Elizabeth Belyeu asked:

I know full well that I have retirement accounts from two former jobs sitting around… somewhere. I know what I ought to do is get the money rolled into my current retirement account, which incidentally is with TIAA-CREF. Right? I’ve known that for… a couple years, really. But the very thought is so overwhelming that I haven’t done a single thing to deal with it. I don’t have any idea where to start.

L.M. Schulte had a similar concern:

The thing I really want to know is whether these orphan accounts should be rolled over or left with the original company to make money. How do I decide? Has The Billfold done a story on rolling over/ not rolling over? I’d love to see one if it hasn’t.

So let’s talk it through! When you leave a job, should you roll over your 401(K) or leave it be? If you leave it be, you won’t be able to contribute to it anymore, but it should be safe and fine; plus, you don’t have to make any annoying phone calls. If you roll it over, you will need to set aside some time to pick up the phone, fill out some forms, and also decide on a destination for your investments. (The third option, cashing it out, will cost you big time and should only be considered in an emergency.)

Still, though it’s the more time-intensive choice, NerdWallet advises that “you probably should” take your old 401(K) with you when you go in the form of a direct rollover, in which the funds go straight from Account A to Account B, explaining that, “leaving your account behind is kind of like leaving money in a savings account at a small-town bank when you’re moving to another state — you can do it, but life will be easier if you don’t.” And since the fees are lower, you should probably not shift your balance into a new 401(K) — if you’re lucky enough to have another employer-sponsored one — but rather an IRA. Even with the taxes you may have to pay, depending on whether you choose a Traditional or a Roth IRA, the transition will be worth it.

The kind of investments you can choose for your IRA are comparatively dazzling, too, like Oz after Kansas:

If this is your first IRA, you’ll probably be surprised at the world of investments available at your doorstep, especially compared with the measly selection of 10 to 20 funds in your 401(k): You can invest in mutual funds — a much wider selection of them, including index funds and exchange-traded funds — as well as trade stocks and options.

If you want a second opinion, Charles Schwab has a useful page that goes into each option in detail, if you want to pore over the minutiae.

401(k) Rollover Options

If you do elect to do a rollover, US News underlines the importance of making it a direct transfer, rather than an indirect one: “It may seem logical to clear out the current account by requesting a check made out to you, then walking or mailing that check to the new institution to deposit it in your new 401(k). Don’t do it. The repercussions are harsh.” The money should go straight to its new custodian; it shouldn’t even get near enough to you to stir a breeze by your cheek as it passes by.

Case closed, right? Not quite. Bankrate offers a minority opinion.

6 reasons not to roll over your 401(k)

Just as group medical insurance is generally a better bargain than individual coverage, a group retirement plan can offer advantages investors can’t get if they roll the money into an IRA, says Wayne Bogosian, president of the PFE Group and co-author of “The Complete Idiot’s Guide to 401(k) Plans.” … there are some issues — like holding company stock, early retirement or threats of law suits — that can be game changers.

Bogosian stresses that if you do elect to leave your 401(K) where it is, you shouldn’t assume it will lie fallow: “you’ll have the same rights to select funds and reallocate your assets whether you work at the old company or not,” and you’ll continue to be protected as an investor.

Have you had good experiences with one path vs. the other? Any words of wisdom or cautionary tales to share?

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