Should I roll over my old 401(k) to an IRA?

The four options

We hear this one every time somebody changes jobs. Here's what you can do with the old account:

• Leave it where it is. Many plans let you keep your balance after you leave.
• Move it to your new employer's plan. If the new plan accepts rollovers, the old plan sends the money straight over and everything sits in one account.
• Roll it to an IRA. The old plan sends the money to an IRA in your name, and you pick the investments.
• Cash it out. You get a check for the balance minus withholding. The taxable part counts as income for the year, and the 10% additional tax may apply if you're under 59½.

Have the plan send it directly

If you move the money, ask the plan to send it straight to the new plan or IRA. The IRS calls that a direct rollover, and no tax is withheld.

If the plan pays you instead, it has to withhold 20% for federal tax, even if you plan to roll it over. You then have 60 days to deposit the full amount. For example, on a $100,000 balance the plan sends you $80,000. To roll over all $100,000, you'd have to add $20,000 of your own money within 60 days. Whatever you don't deposit is taxed as income, and the $20,000 withheld counts toward your tax bill when you file.

What changes when you move it

A few things are different depending on where the money ends up:

• Investment choices. A 401(k) has a fund menu picked by the plan. An IRA can hold almost any fund or ETF.
• Costs. The old plan, the new plan and an IRA each have their own fund expenses, and an IRA someone manages adds an advisory fee. Compare the total cost of each before you move anything.
• The age-55 rule. If you leave your job in or after the year you turn 55, withdrawals from that employer's plan skip the 10% additional tax. That exception doesn't carry over to an IRA, where the age is 59½.
• Roth dollars. Pre-tax money can go to a traditional IRA with no tax due. Moving pre-tax money into a Roth IRA is taxable.
• Paperwork. Three old 401(k)s from three jobs means three statements, three logins and three beneficiary forms to keep current.

How we're paid if you roll over

If you roll a 401(k) into an IRA that we manage, we charge our advisory fee on that money. That gives us a reason to favor a rollover, and we would rather you know that going in. Ask any advisor, us included, how they get paid under each option.

Questions to answer before you move anything

Here's what to look at first:

• What does the old plan charge, and what would the IRA or new plan cost?
• Did you leave the job in or after the year you turned 55, and might you need the money before 59½?
• Does your new plan accept rollovers?
• Do you have Roth or after-tax dollars in the account?