Think You Need to Roll Over Your 401(k) After You Leave Your Job? 6 Reasons You Might Not Want to, Explained

Friday, July 23, 2021 | Melissa Brock
Think You Need to Roll Over Your 401(k) After You Leave Your Job? 6 Reasons You Might Not Want to, Explained

Did you become one of the participants during the Great Resignation, a mass exodus of workers leaving their current jobs? The career website Monster found that a whopping 95% of workers will consider changing jobs. On the other hand, Microsoft research found that 41% of the global workforce has considered leaving their current employer this year.

If you were one of the people who took advantage of a new opportunity, you might wonder what to do with the 401(k) you had with your former employer. Should you jump on a rollover? Should you try to put your old 401(k) into the new 401(k) with your new employer? You might not want to do either of these things and let's find out why.

What is a 401(k) Rollover?

A 401(k) rollover involves transferring the money in your 401(k) plan to a new 401(k) plan or IRA. You can roll it over to another plan or IRA within 60 days from the date you receive a personal distribution.

Reasons You Might Want to Skip the Rollover

You may want to keep your 401(k) savings in your existing plan after you leave your job, and your employer might let you! Note that you often have to meet a minimum balance requirement.

Note that if you opt to keep money in a former employer's plan, you will not be able to make additional contributions to your balance. However, it will still experience tax-deferred compounding — the excellent kind of growth everyone wants.

Reason 1: You may like your former employer's investing options.  

You may like the investment lineup in your former employer's retirement plan, so why move it out? If you like your plan portfolio, you can keep the money there. On the other hand, if you think it charges too many fees or doesn't offer a lot of investment options, you may want to move your money out.

Reason 2: Your former employer offers unique investments.

Your former employer may offer the opportunity to invest in unique investments. For example, let's say you really like a particular combination of environmental, social and governance (ESG) investments. Or maybe you have access to items like stable-value funds that you can only get through a 401(k) from your employer.

In other words, you may not find that exact combination of unique investments anywhere else, so if you like the investments your former employer offers, you might want to keep your money right where it is. 

Reason 3: You find that your former plan has lower fees. 

Many employer-sponsored retirement plans give you access to low-cost index funds or cheaper institutional share fund classes. If you've done your research and realized you can't find these same lower costs in an IRA, you may want to keep your money in your former employer's plan. (Who can argue with low or no administrative fees?)

Reason 4: You're protected from lawsuits. 

Employer-sponsored retirement plans get better creditor protection under federal law compared to IRAs. Federal law provides protection for individual retirement accounts to help prevent creditors from raiding your IRA.

They are protected from creditor judgments, including bankruptcy. (Note that if you're moving into a Solo 401(k), they don't have the same protections as other 401(k) plans in some states. 

IRAs, including Roth IRAs, don't have precisely the same protection. However, under a 2005 law, the Bankruptcy Abuse Prevention and Consumer Protection Act, you can shield up to $1 million in an IRA.

Reason 5: You own company stock in your old 401(k).

Rolling company stock from a 401(k) into an IRA might not be a wise choice.

The tax code allows you to benefit from special tax treatment under "net unrealized appreciation" rules, which will save you a lot of money.

Rather than paying ordinary income tax on the market value of shares of sold company stock, you can pay capital gains tax on any appreciation over your cost basis when you sell your shares. Investors in the bottom two tax brackets will not owe any income tax on capital gains. 

You can no longer use the NUA rules if you roll your money to an IRA. In this case, check with a financial and/or tax advisor for more information.

Reason 6: You want your money earlier.

Usually, you have to wait until at least age 59 ½ to start accessing funds in an IRA. Not so if you quit, retire or get fired at age 55 or just thereafter. You can take the money out then if you want, rather than keeping your money tied up for another 4 ½ years. 

Whatever You Do, Don't Cash it Out!

Good for you for having money you can access in your 401(k). Fortunately, you have plenty of options with that money — including rolling it over. If you think you might forget about it, particularly if you're at the beginning of your career, you might want to roll it into an IRA.

However, you can find good reasons for keeping it where it is. 

Just remember to not take the lump sum and spend it all. You'll have to pay withdrawal penalties and you'll miss out on the miracle of compounding. 

You can avoid the temptation to go on a spending spree by having it sent directly to your new IRA plan administrator. (If you have it sent to you and don't get it rolled over before the 60-day deadline disappears, your distribution will count as a withdrawal and you'll owe ordinary income tax and a 10% early withdrawal penalty if you're not 55 or older.)

You may also wonder whether you can roll your old 401(k) into your new employer's 401(k) — and that may or may not be allowed by your new employer. You'll want to check with your new plan administrator.

7 Undervalued Stocks in an Overvalued Market

In June 2021 the investment firm, Bespoke Investments made this ominous pronouncement: “Investors simultaneously think the market is overvalued, but likely to keep climbing.”

This statement was meant to be a warning to investors. However, investors have shown that they can be very resilient even as the major indices continue to reach new highs.

So it would seem strange to be looking at a list of undervalued stocks. But looking at undervalued stocks is a form of value investing. And in 2021, investors are shifting between growth and value investing on a monthly, if not weekly basis.

An undervalued stock is one that is considered to be trading below its fair value. However, there’s no singular right way to identify undervalued stocks. Some investors prefer to look at fundamental metrics. Others will look for technical signals.

The one common element of all undervalued stocks is that they are stocks that have room to grow. That’s something that all investors can get behind. And in this special presentation, we’ll take a look at seven stocks that are showing signs of being undervalued at this time.

View the "7 Undervalued Stocks in an Overvalued Market".

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