Should you consider rolling over your 401-k to a personal IRA?

If you have recently left your job (or if it has left you), it's likely that you have an orphan retirement account at your old firm. Should you leave it there? If not, what should you do with it? What are the tax implications of your decision? What questions should you be asking that you don't know you should be asking?

Here are some guidelines to help:

Be Careful!

Tax-deferred retirement plans have very specific rules set in place by the IRS that you must follow. If you break these rules you could set a very nasty tax event in place. Given that information, why would you want to risk a large tax bill by playing around with your old 401-k? Because these tax consequences are easily avoided, and the potential benefits can be substantial, that's why! Let's take a look at the pro's and con's of moving that money.

Pro's

• The money will be under your direct control. Suppose you need emergency cash. Depending on your firm's plan, you may not be allowed access to any of that money. With a personal IRA you can always get your hands on the money if you need it. There may still be penalties if you are under age 59 1/2, and you'll pay taxes on any distributions, but it's your money.
• You can consolidate other tax-qualified accounts. You may have more than one 401-k with different firms. It's a good idea to consolidate them all into one IRA account, that you own.
• More investment choices. You may be able to have more choice of investments in your own IRA, with more than one type of investment vehicle. It's not uncommon for investors to do much better in an individual plan than through a company plan.
• More freedom to determine how your heirs will get this money, should you die. For example, a stretch IRA can potentially turn a good size inheritance into an incredible inheritance stretched over three generations. You'll rarely get this kind of advice from a company managed account.
• Many firms will provide a bonus on rollover. Some institutions pay as much as 10%. And what's wrong with that?

Con's

• You may forfeit good management of your money. It may be that the money manager of the old fund is doing a great job. If so, maybe you should just let him keep doing his job.
• You are related to the stockbroker who manages the old fund. Your sister has married him and is now pregnant with her 15th child. They really need the money.

Really?

OK, I guess you can see that I was struggling to find some cons. The fact is, you have been handed a gift by your old employer. The firm you left is no longer matching any contributions you might put in, and there are probably tons of restrictions on what you can do with it if you leave it with them. In most cases, you should take the money and move it into your own tax-deferred IRA, where you'll have complete ownership of it. Just make sure the rollover is done correctly and plays by the IRS rules to avoid tax consequences. Again, here's where using a competent financial person to manage this rollover makes sense.

Until next time,

Larry

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