The days of employee loyalty to one company are over. And it isn’t the employees’
fault. With mergers and acquisitions, downsizing and outsourcing, employers have
stripped employees of any confidence their job is secure. As a result, it is not
uncommon for workers to change jobs several times in their career.
Changing jobs often results in a decision: What should you do with that 401(K) or 403
(B) plan from the previous employer?
Let’s first take a look at 403(B) tax-deferred retirement plans. These plans are typically
offered by tax-exempt private organizations, public schools and colleges. Although very
similar to 401(K) plans, 403(B) plans often are accompanied by high fees and stiff
surrender penalties. In many cases the plans are offered by insurance companies as
variable annuities. Variable annuities involve an element of insurance and with it the
associated costs of insurance. It is not uncommon for the total fees to be 1.5% to 2.0%
of assets, or more. In addition, many charge declining surrender fees of 5%-7% or
more, for five to seven years or more. The funds offered are often proprietary funds of
the insurance company and in many cases are not stellar performers. In most cases, we
recommend that clients roll over these plans to IRA accounts that offer lower fees and
better investment choices. If you have one of these plans, check on the surrender fees
first. You may want to wait until the fees have expired before rolling it over.
Now let’s take a look at 401(K) plans. There are often several advantages to rolling a
401(K) over to an IRA account.
First, some 401(K) plans have limited distribution options for beneficiaries. In some
cases a non-spouse beneficiary may have to receive the entire balance of the decedent’
s IRA within five years of the owner’s death. IRAs typically provide flexible distribution
options that avoid a mandatory five-year payout to non-spouse beneficiaries.
Rolling over your 401(K) to an IRA can provide you with better investment choices, often
with much lower fund expenses (This depends, of course on the IRA provider that is
chosen). Once you’ve rolled the 401(K) over, you won’t have to communicate in any way
with your old company and it will help you consolidate your accounts with one investment
firm.
With both 401(K) and 403(B) plans, there may be a reason to keep the old 401(K). If
you plan to retire early and will need funds from your retirement accounts to get by until
Social Security kicks in, then you may want to roll over the 401(K) or 403(B) to your new
employer’s plan, if they allow it. Why would you want to do that? If you separate from
an employer after age 55, you can withdraw from that employer’s 401(K) or 403(B)
without having to pay a 10% tax penalty (for distributions prior to age 59 and ½).
Note that you can also roll your 401(K)/403(B) over to a separate IRA, and then if you
later take a job with a new employer with a 401(K) plan that allows other plan rollovers,
you can then roll the separate rollover IRA to the new 401(K)/403(B) plan. There is also
a way to take distributions from IRAs, 401(K)s and 403(B)s before age 59 and ½ without
paying the 10% tax penalty. It’s done by taking what are called substantially equal
periodic payments under the IRS 72(t) regulation. We will cover 72(t) distributions in
another article.
Keeping your 401(K) may also provide the ability to take some hardship distributions or
borrow from your plan, but we believe such distributions should be taken only as a last
resort. In most all cases, we recommend that clients roll their 401(K) or 403(B) plan
over to an IRA after they leave their employer.
In summary, if you move to a new job in future or just recently changed jobs, give
serious consideration to rolling your 401(K)/403(B) plan over to a low-cost IRA.
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, November, 2007
Should You Roll Over Your 401(K)?
By David and Erin Patterson