Schulfer & Associates, LLC

Should I Roll Over My 401(k)?

When you leave a company, you generally have four options as to what to do with your retirement money. 


1)      Cash it out.  Brace yourself for the taxes due and, if you are under 55 for certain types of plans or 59 ½ for others, an additional 10% early distribution penalty.  You’ll be taxed at ordinary income tax rates which could surprise you at the end of the tax year if/when the added income kicks you into a higher tax bracket. Worse yet, you are robbing yourself of the power of potential tax favored compounding returns.  It is said that Albert Einstein called compounding the eighth wonder of the world.  The magic of compounding comes from time.  Years are needed and there is no good substitute for time.

2)      Leave the money.  Most employers will allow you to leave the money in their retirement plan but unfortunately, you will not be allowed to make any new contributions.  This may be in your best interest if you are happy with the investment choices in the plan, the service and guidance that you receive from your plan representative, and the expense ratios paid within the plan.  Total expenses can be difficult to assess, so be sure you do thorough due diligence to fairly compare total plan expenses versus other options.  I’ve had people tell me a number of times that their 401(k)s do not have any expense.  That is simply not true. Investments have a cost and I assure you that people administering the plan are not doing it for free.  If you are concerned about lawsuits, leaving your money in your 401(k) could offer some protections:  consult with your legal counsel on this matter.  If you hold company stock inside of your employer sponsored retirement plan, you may be best leaving it there for tax purposes upon distribution.  Consider net unrealized appreciation before you make a decision to roll it out.

3)      Roll the money into a new 401(k) such as your new employer.  Most employers allow you to roll new money into their plan.  If you are satisfied with your new plan, this may be a viable option for you.  Remember though that as you contribute more money and your account value grows, you are limited to the investment choices  within this plan.  A fundamental tenet of investing is diversification, or not having all of your “eggs in one basket”. 

4)      Rollover the money to an Individual Retirement Account.  An IRA is merely an account titling for tax purposes; you get to choose the investments inside of your IRA.  Therefore, you’ll have a universe of choice and greater flexibility.  You can set up an IRA on your own or work with an experienced personal financial advisor.  If retirement is in your cross-hairs, you can choose investments that may be better oriented for providing reliable retirement income distribution that would not be available within your 401(k).  Often when I meet with people nearing retirement, one of their largest concerns is outliving their nest egg.  They fear large market losses.  But, there are other concerns retirees need to be aware of, such as Required Minimum Distributions.  RMD’s need to begin at 70 ½.  If you miss one, the penalty is 50% of what you should have taken, a costly oversight.  Having the advice and guidance of an experienced advisor can be significant.


If you are young and in a low tax bracket, consider a direct rollover and immediate conversion to a ROTH IRA; this could really be compelling.  You’ll have to pay income taxes on the conversion, but if you expect your earnings to increase over the years, taking advantage of paying taxes in a lower bracket could be financially rewarding in the long run.  Then, you’ll get the benefits of ROTH, which include tax-deferred compounding (the more years, the better)  and tax-free qualified withdrawals. 


Don’t make a 401(k) mistake.  Avoid a tax fiasco by making sure your instructions are for a direct rollover. Do not have the check made out to you, as this would be considered a taxable distribution rather than a tax-free rollover .  Your IRA provider will be happy to walk you through the process including account titling and rollover instructions.  The process is really quite painless. 


Saving for retirement is one of the largest and most important financial goals most people have.  Considerations are complex and decisions should be well thought out.  The great news is, you have an array of options to best suit your individual needs.


(Author’s note:  Due to industry regulations, I am prohibited from responding to any online comments. I welcome you to contact me via e-mail:


LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Financial Professionals and can be reached at (715) 343-9600 or


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