A 2016 study from LinkedIn showed that working professionals who graduated college between 2006 and 2010 have already switched jobs an average of 2.85 times. The same study shows that the number of companies most people work for 5 – 10 years after graduating has increased as well.
It's hard to say why people job hop more often these days, but it's easy to spot how this could make the average worker's portfolio a lot more complicated. At the end of the day, all those jobs can mean only one thing – you’ve got multiple 401(k) plans spread across a handful of old employers.
So, what should you do?
6 Times Rolling your 401(k) into an IRA Could Hurt Your Finances
As a financial planner, I meet with individuals who face this exact issue on a regular basis. While some are decades away from abandoning their desk jobs and becoming financially independent, others are shockingly close to hanging their work hat for the last time.
While it’s common wisdom for transitioning workers to randomly roll their 401(k) accounts into an IRA with a new firm, I know for a fact doing so isn’t always the best idea…and it can even be dangerous.
Here are six instances where the hassle and stress of rolling your 401(k) into a new IRA isn't worth it:
#1: You plan to retire early.
Not too long ago, my firm met with a client who was making steady progress to retirement. This gentleman was 49-years old, saving a ton of cash in his 401(k) account, and hoping to retire early if he could.
Around 70 percent of his portfolio was in a 401(k) account offered by his employer, which is part of the reason he set up our appointment in the first place. While our client had been happy with his 401(k) all along, he knew he wanted to ditch his career ASAP and wondered whether his funds would be better off in a new IRA.
Long story short, it didn’t take long for us to figure out he would do just fine if he held on tight – and that he could end up ahead if he retired early. Not only were the fees on his 401(k) lower than average, but the funds were healthy and profitable. Since his money would need to sit tight in this account for quite a while, those factors were important.
Beyond that, the fact that this fellow wanted to retire early meant that accessing his money could be more difficult than he realized. If he retired at age 57 and had his money in an IRA, he would need to file a 72(t) withdrawal to access his funds. That means he would have to fill out some complex paperwork and agree to five somewhat-equal annual payments to get his hands on his money without the typical 10% penalty you incur for withdrawals made before age 59 1/2.
If still had his funds in his 401(k), on the other hand, he could access the money as if he was traditional early retirement age (59 ½) provided he left his company and quit using the 401(k) plan after age 55.
#2: Your 401(k) plan has especially low fees.
While many employer-sponsored 401(k) plans are abysmal in terms of both their investment options and fees, there are plenty of exceptions. Personally, I’ve seen plenty of 401(k) plans that offer some pretty awesome funds with some of the lowest fees in the business!
If you’re lucky enough to have money in a reputable 401(k) plan with fees that are far below average, you would be crazy to roll that money into a new IRA that could cost more or put you into investment options that are less than optimal.
While there’s nothing wrong with shopping around to compare IRA options to your current 401(k), doing an apples-to-apples comparison is essential. At the end of the day, a high quality 401(k) plan with low fees is hard to beat. Thank your lucky stars if you have one, and focus your efforts on optimizing the rest of your investments instead of trying to reinvent the wheel.
Financial advisor Joseph A. Azzopardi of The Well Planned Retirement recommends conducting a thorough fee analysis on your current 401(k) and any options you're considering before you move forward.
“Total fees in both the existing 401(k) plan and alternative options should be extensively examined and compared,” says Azzopardi. “Higher quality 401(k) plans often have very affordable investment options that can be much cheaper than comparable funds outside of the plan. A copy of your 401(k) plan documents will allow a professional to do a thorough cost analysis in order to help make the decision that’s right for you.”
“Be sure to compare the fees you pay with your 401(k) and what you would pay with a new management team and custodian,” notes financial advisor Matthew Jackson of Solid Wealth Advisors. “A surefire way to hurt the growth in your retirement savings account is by paying more in fees than you have to.”
#3: You have company stock in your 401(k).
Another factor to consider before you roll over a 401(k) into an IRA is whether you own company stock in your 401(k) plan.
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If you have worked for a company for a long time, then it’s possible you have a low-cost basis that is truly benefiting you.
If you’ve been working there for ten, twenty, or thirty years and the company stock has surged in value, then you may even have a unique opportunity to save money on taxes as well – one that doesn’t involve rolling your 401(k) plan into something else.
If you own company stock in a 401(k), you can do a Net Unrealized Appreciation withdrawal on those funds. What this means is, you can pull the stock out in a way that helps you save money on taxes. With a Net Unrealized Appreciation withdrawal, you may only have to pay income taxes on the cost basis while paying capital gains on the actual appreciation.
“Say you work for a company and have a cost basis of $10,000 in company stock in the 401(k) and a current value of $50,000,” says Wisconsin financial advisor Brian D. Behl. “If you rollover the funds to an IRA and later distribute them, you will pay ordinary income tax on the full $50,000 value.”
“Instead, using the NUA strategy you are able to distribute the $50,000 of company stock paying ordinary income tax (often 25% or more) on the $10,000 basis amount. Then, you pay capital gains tax (typically 15%) on the $40,000 of appreciation. This could be half of what your ordinary tax rates are, saving you a significant amount of money on your taxes. In this example the 10% tax savings on the unrealized stock appreciation would equate to $4,000,” explains Behl.
If you’re trying to save money on taxes, which you should be, this is an important consideration to make.
#4: You plan to work past age 70 ½.
Not everyone wants to retire early, and this is yet another reason to be wary of rolling your 401(k) into a new retirement vehicle without giving it some thought.
If you plan to work past age 70 ½ (the age where you must start taking required minimum distributions, or RMDs), you may want to keep your 401(k) plan active. That’s because, according to the IRS, you aren’t required to take RMDs if you’re still working and using your plan beyond age 70 ½.
“If you intend to stay employed beyond the age of 70 ½, IRS Publication 590 may offer a solution,” notes Orange County Financial Advisor Anthony Montenegro. “Provided you’re still employed, you are allowed to continue making salary deferrals to your 401(k) and your employer is still required to make contributions to your plan. This strategy can work toward offsetting your taxable income, reduce your annual tax liability, and add to the compounded growth rate of your money.”
If you rolled those funds over to an IRA, on the other hand, you would have to take an RMD regardless of whether you’re still working or not. And you know what that means – less flexibility in your financial plan and an inconvenient tax bill you may not be ready to pay.
#5: You may want to borrow against your 401(k).
While I’m generally against taking out a loan against the funds in your 401(k), there are instances when doing so can make sense. You might need a temporary cash infusion while you buy a new home or start a business, for example. You might encounter an emergency situation where borrowing money is essential, and look to your 401(k) for help.
While you can borrow against your 401(k) with favorable terms, it’s not possible to take out a loan against an IRA. This is yet another reason you should think long and hard before you consolidate retirement accounts or roll your 401(k) over – doing so will simply limit your options when it comes to borrowing money.
#6: Your 401(k) may offer more legal protection than you think.
Nobody wants to imagine they’ll be sued or face a legal judgement, yet it happens all the time. In this case, your money may be a lot safer in a traditional 401(k) account.
Cash held in a 401(k) is protected by federal law and safe from most types of creditor judgments, including bankruptcy, notes Texas financial advisor Ty C. Hodges of Client Centric Wealth. Funds held in any type of IRA, on the other hand, are only protected by state law.
So, while the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 does offer $1.2 million in protection over traditional or Roth IRA assets in bankruptcy, state laws vary when it comes to other types of judgments.
The Bottom Line
If you’re on the fence about rolling your 401(k) into an IRA, the best thing to do now is wait it out. Whether it’s a good decision or not, there is no reason to move forward until you’re certain deserting your old 401(k) will leave you better off.
Even if you left your job or got fired, your old employer has no right to dictate how you handle the cash in your 401(k). There is no timeline to consider, and there is no deadline for you to roll your 401(k) plan into an IRA. Even if your employer sends a letter suggesting you consider your options, they cannot compel you to do anything you don’t want.
Take all the time you need to evaluate your situation. Better yet, sit down with a fee-only financial advisor to get their honest take on the situation. While it might make sense to drop your 401(k) as quickly as you can, it’s equally possible you’re in a good spot already.
But, don’t take my word for it. Do the research, run the numbers, and ask a lot of questions. While rolling your 401(k) into an IRA has been a hot topic lately, that doesn’t mean it’s the right move for everyone.
This post originally appeared on Forbes.