I’m always being asked whether or not to move a 401(k) or other employer-sponsored pension plans when leaving an employer. Generally the answer is “move your pension money when you leave an employer”. Here are some advantages of moving a 401(k) rather than leaving it:
1. You get more investment choices and opportunity to better diversify.
2. Expenses may be lowered.
3. You can consolidate with other money which makes administration easier.
4. It is oftentimes easier to get if you need for an emergency.
5. Can covert to a Roth IRA if you qualify and if a Roth is appropriate.
6. You no longer have to worry about the financial stability, urge to merge or sale of your ex-company … and this is very important if your plan contains their stock. If your plan contains company stock investigate the tax advantages of rolling the stock out of the plan, paying the taxes on your basis and holding the stock outside the plan OR selling it immediately to get capital gains treatment. You’ll want to consult with a tax professional before acting.
7. Eliminates the chance of lump-sum distribution to beneficiaries in case of your death.
8. Avoids spousal consent if you want to change beneficiaries — of course this could be a disadvantage if you’re the dependent spouse.
9. Better manage the tax liability of your surviving spouse and/or heirs.
10. Ability to convert your money into a lifetime income you can’t outlive.
Here are some disadvantages of moving your 401(k) from an ex-employer:
1. Some states do not give the same creditor protection to IRAs that they do to 401(k)s. If this is important, check your state statutes.
2. If you have life insurance with your ex-employer as part of the 401(k) plan, you may lose it if you transfer the money.
3. If you plan to retire after age 55 but before age 59-1/2 you may have better lump-sum access to your 401(k) than to an IRA.
4. If you have a loan outstanding from your 401(k), it will need to be repaid prior to rolling over into an IRA.
5. You may have access to an investment inside your ex-employer’s 401(k) that will be lost if you roll over into an IRA, e.g., ex-employer stock that you think will continue to outperform other alternatives you could have.
6. Loss of spousal consent to change a beneficiary.
The roll over of your 401(k) plan at an ex-employer to an IRA makes a great deal of sense in the majority of cases; however, there could be circumstances that might make it better to stay put. Rolling over your pension money from an ex-employer should be undertaken with the advice and counsel of a financial professional that specializes in retirement planning. The process of assessing your options is fairly straightforward and, if action is needed, rolling over is easy and painless. If you are staying put because of loyalty to your lifelong employer, your sentiments are to be complemented; however, when it comes to your retirement savings, your first loyalty must be to you and your family. Most retirement planning professional agree that “money in employer-sponsored plans should go with you when you the leave the company”.