Table of Contents
Your Options
Do nothing (if allowed)
Cash out your account (painful)
Rollover to a non-managed IRA
Rollover over to an IRA under our (or another advisor’s) management
Rollover to the new employer plan (if allowed)
Understanding Fees
Assets Under Management (AUM) Fees
401(k) Administration Fees & Other Fees
Investment Options Expense Ratios
Tips & Traps
20% Irs withholding trap - Indirect or incorrect direct rollover
Minimize taxes by Matching Roth to Roth and Traditional to Traditional
Special Treatment of Employer Matches in Roth Plans
Be Wary of “Free” or “No Fee Claims
Realize Conflicts of Interest
Appreciated Company Stock has different tax implications
Age Matters
Other Areas of Risk
Accidentally giving legal advice
Accidentally giving tax advice
Illegally giving insurance advice
Exceptions & What Ifs
What isn’t covered by the IAA and why you don’t apply
Commentary on common questions from coaches
Joshua Escalante Troesh, CFP | MBA
The Author
Joshua is a Tenured Professor of Business, a Certified Financial Planner, and founder of Purposeful Strategic Partners. He was the #1 ranked financial advisor nationally on Investopedia’s Advisor Insights* and has been quoted in Forbes, Consumer Reports, CNBC, The Wall Street Journal and numerous other publications.
Rollover Options
Options we don’t recommend
Bad Ideas
Option 1
Cash Out Your Account
You can liquidate your account, but this is a costly option. Usually, your employer is required to withhold 20 percent of your account balance to prepay your tax liability, but this may not be enough to cover the taxes owed. Additionally, the IRS may charge an early withdrawal penalty ranging from 10% (most common) to 25% of the account balance on top of combined federal, state, and local taxes. We generally discourage our clients from liquidating their accounts because the total tax penalties and consequences can eat up more than half (50%+) of your account’s value.
Advantages
Immediate access to funds.
Disadvantages
Loss of a significant portion of the account value due to federal, state, local taxes being owed.
Likely to increase your tax bracket due to concentrated tax liability in the year of withdrawals.
May increase taxes on your salary and other income or reduce deductions and tax credits due to Adjusted Gross Income being reported.
Additional penalty (10%-25%) if an exception doesn’t apply under the law.
Option 2
Do Nothing
You may be able to leave your account with your previous employer, if permitted by the plan’s documents. Not all plans allow for accounts to be left meaning the plan may cash you out and send you a check, along with all the taxes, penalties, and problems identified in Option 1. Even if they do allow it, we generally discourage clients from taking this option. Having multiple plans from multiple previous employers creates and administrative burden and increases the likelihood you’ll forget about and lose a portion of your retirement funds. And as you enter retirement, holding multiple employer plans greatly increases the complexities of your taxes.
Advantages (if Allowed)
Maintain tax-deferred status and avoid withdrawal penalty.
Protection from creditors and bankruptcy.
Access to educational resources and investor support from your previous employer plan administrator.
Disadvantages
Limited investment choices and potentially high fees.
Less flexible distributions and new contributions are not allowed.
Subject to changes made to the plan by your previous employer.
Extra work for managing multiple accounts.
Potential for conflicted advice from plan advisors who are commissioned sales representatives.
Good Options we may recommend
Good Rollover Options
Option 3
Roll Over to a Purposeful SP IRA
The easy-button. Engage our firm to roll over your account to the your appropriate IRA account with no taxes or IRS fees or penalties. You’ll maintain all the tax advantages of your 401(k) plan, have access to more investment options, and retain sole ownership of all of your money and your account. Plus you’ll receive comprehensive financial planning on your entire financial life (not just retirement) from a fiduciary Certified Financial Planner.
Advantages
Maintain tax-deferred status and avoid withdrawal penalty.
Assets remain protected from bankruptcy.
Robust Financial Planning
An experienced Certified Financial Planner will work with you to integrate your investment strategy within your broader financial plan.
Integrated tax planning, cash flow planning, risk management (lawsuit liability), investment management, retirement planning, estate planning and more.
Advising on non-retirement assets including real estate, debt management, lifestyle assets, investing for other goals, and more.
Access to an advisor who does not sell products on commission and is legally required to place your interests above their own.
More investment choices, services, and features not present in your workplace plan.
Each account in your portfolio can be adjusted to optimize account tax benefits:
Roth 401(k) accounts are subject to IRS required minimum distributions whereas Roth IRAs are not.
Less Work For you
Your accounts are consolidated for efficient monitoring and management.
You are free from paperwork and account administration.
We manage and rebalance your investment portfolio according to your changing financial needs.
We implement investment and tax strategies such as Roth conversions and tax-efficient asset location.
The lifetime tax implications of your investment strategy are managed and minimized.
Potential Fee Savings
Expense ratios and fees may be lower in IRAs managed by PSP than those in your old plan.
AUM will eliminate financial planning fees once AUM minimums are met.
Disadvantages
AUM fees will apply to assets under PSP management, which may be more or less than the cost of your existing 401(k) fees. (Explanation of AUM fees below)
If you are subject to a higher-than-average lawsuit risk, IRA funds have lower liability protection than ERISA-covered plans.
Withdrawals from your current employer’s plan may be made as early as 55 without penalty vs. 59½.
Option 4
Roll Over to Non-Managed IRA
Transfer your account to an IRA and self-manage the account. This is optimal for the Do-It-Yourselfer who wants to take the time to properly manage the investment, tax, and other implications. While this is doable, these implications can be complicated, especially as they relate to tax law. You can also use our Ask-A-CFP session to review your plan and strategy.
Important: Make sure you roll over the account as a direct trustee-to-trustee transfer. If you roll it over as an indirect rollover or the direct rollover check from the old plan administrator is made out to you, you may be subject to an IRS withholding of 20% of the account value. You’ll then need to find and contribute the 20% difference from your other money within 60 days or it will be a deemed distribution subject to taxes and penalties. You will get that 20% back, but only after filing your taxes the next year.
Advantages (if Allowed)
Maintain tax-deferred status and avoid withdrawal penalty (if done correctly).
Consolidate retirement savings into one account and may allow new contributions.
More control, and responsibility, over investment strategy.
More investment options.
May avoid AUM fee but other fees will apply.
Protection from bankruptcy.
Disadvantages
Fees may be higher than the employer plan or other options.
IRA brokers/custodians may charge an AUM fee or other maintenance fee for very little advice.
You’ll need to come up with 20% of the accounts value if the rollover is done incorrectly.
You will need to administer the account including rebalancing, managing tax implications, or re-allocation of portfolio as circumstances change.
Tax costs and IRS penalty fees may be incurred if tax implications are not managed.
Penalty for withdrawals made before you reach 59½ if another exception doesn’t apply.
Limited protection from creditors.
Potential for conflicted advice from staff who are commissioned sales representatives.
Option 5
Roll Over to New Employer Plan
If your new employer’s plan allows it, you can roll over your old 401(k) to your new 401(k). The same warning applies as the last option, however, as you’ll need to confirm the roll over is done correctly to avoid the 20% IRS withholding. Depending on the new employer’s plan, fees, and investment options, this may be a good option. You’ll want to carefully read the plan’s legal filings and investment options. And pay close attention to the fees you may be paying vs. the fees your employer is paying.
My wife’s plan at one of her old law firms charged a 2.95% annual AUM fee on top of investment fund fees of up to 1.5%. This was triple the all-in fees we charge our clients for ongoing advice - but she did get to meet with the person once for 30 minutes.
Advantages (if Allowed)
Maintain tax-deferred status and avoid penalties (if done correctly).
Consolidate retirement savings into one account and allow new contributions.
The plan administrator is required to monitor cost and investment options.
Protection from creditors and bankruptcy.
Access to withdrawal funds at age 55 if you retire from this employer and meet other eligibility requirements.
Disadvantages
Limited investment choices.
Potentially higher investment fees and advisory fees.
Subject to changes made to the plan by your employer.
Potential for conflicted advice from plan advisors who are commissioned sales representatives.
Understanding Fees
Good Options we may recommend
Rollover Options
Option 3
Roll Over to a Purposeful SP IRA
The easy-button. Engage our firm to roll over your account to the your appropriate IRA account with no taxes or IRS fees or penalties. You’ll maintain all the tax advantages of your 401(k) plan, have access to more investment options, and retain sole ownership of all of your money and your account. Plus you’ll receive comprehensive financial planning on your entire financial life (not just retirement) from a fiduciary Certified Financial Planner.
Advantages
Maintain tax-deferred status and avoid withdrawal penalty.
Assets remain protected from bankruptcy.
Robust Financial Planning
An experienced Certified Financial Planner will work with you to integrate your investment strategy within your broader financial plan.
Integrated tax planning, cash flow planning, risk management (lawsuit liability), investment management, retirement planning, estate planning and more.
Advising on non-retirement assets including real estate, debt management, lifestyle assets, investing for other goals, and more.
Access to an advisor who does not sell products on commission and is legally required to place your interests above their own.
More investment choices, services, and features not present in your workplace plan.
Each account in your portfolio can be adjusted to optimize account tax benefits:
Roth 401(k) accounts are subject to IRS required minimum distributions whereas Roth IRAs are not.
Less Work For you
Your accounts are consolidated for efficient monitoring and management.
You are free from paperwork and account administration.
We manage and rebalance your investment portfolio according to your changing financial needs.
We implement investment and tax strategies such as Roth conversions and tax-efficient asset location.
The lifetime tax implications of your investment strategy are managed and minimized.
Potential Fee Savings
Expense ratios and fees may be lower in IRAs managed by PSP than those in your old plan.
AUM will eliminate financial planning fees once AUM minimums are met.
Disadvantages
AUM fees will apply to assets under PSP management, which may be more or less than the cost of your existing 401(k) fees. (Explanation of AUM fees below)
If you are subject to a higher-than-average lawsuit risk, IRA funds have lower liability protection than ERISA-covered plans.
Withdrawals from your current employer’s plan may be made as early as 55 without penalty vs. 59½.
Option 4
Roll Over to Non-Managed IRA
Transfer your account to an IRA and self-manage the account. This is optimal for the Do-It-Yourselfer who wants to take the time to properly manage the investment, tax, and other implications. While this is doable, these implications can be complicated, especially as they relate to tax law. You can also use our Ask-A-CFP session to review your plan and strategy.
Important: Make sure you roll over the account as a direct trustee-to-trustee transfer. If you roll it over as an indirect rollover or the direct rollover check from the old plan administrator is made out to you, you may be subject to an IRS withholding of 20% of the account value. You’ll then need to find and contribute the 20% difference from your other money within 60 days or it will be a deemed distribution subject to taxes and penalties. You will get that 20% back, but only after filing your taxes the next year.
Advantages (if Allowed)
Maintain tax-deferred status and avoid withdrawal penalty (if done correctly).
Consolidate retirement savings into one account and may allow new contributions.
More control, and responsibility, over investment strategy.
More investment options.
May avoid AUM fee but other fees will apply.
Protection from bankruptcy.
Disadvantages
Fees may be higher than the employer plan or other options.
IRA brokers/custodians may charge an AUM fee or other maintenance fee for very little advice.
You’ll need to come up with 20% of the accounts value if the rollover is done incorrectly.
You will need to administer the account including rebalancing, managing tax implications, or re-allocation of portfolio as circumstances change.
Tax costs and IRS penalty fees may be incurred if tax implications are not managed.
Penalty for withdrawals made before you reach 59½ if another exception doesn’t apply.
Limited protection from creditors.
Potential for conflicted advice from staff who are commissioned sales representatives.
Option 5
Roll Over to New Employer Plan
If your new employer’s plan allows it, you can roll over your old 401(k) to your new 401(k). The same warning applies as the last option, however, as you’ll need to confirm the roll over is done correctly to avoid the 20% IRS withholding. Depending on the new employer’s plan, fees, and investment options, this may be a good option. You’ll want to carefully read the plan’s legal filings and investment options. And pay close attention to the fees you may be paying vs. the fees your employer is paying.
My wife’s plan at one of her old law firms charged a 2.95% annual AUM fee on top of investment fund fees of up to 1.5%. This was triple the all-in fees we charge our clients for ongoing advice - but she did get to meet with the person once for 30 minutes.
Advantages (if Allowed)
Maintain tax-deferred status and avoid penalties (if done correctly).
Consolidate retirement savings into one account and allow new contributions.
The plan administrator is required to monitor cost and investment options.
Protection from creditors and bankruptcy.
Access to withdrawal funds at age 55 if you retire from this employer and meet other eligibility requirements.
Disadvantages
Limited investment choices.
Potentially higher investment fees and advisory fees.
Subject to changes made to the plan by your employer.
Potential for conflicted advice from plan advisors who are commissioned sales representatives.