Top 5 401(k) Rollover Questions to Ask Your Advisor

Like boxes in the attic, most people have an employer sponsored plan like a 401(k) just sitting out there from a former employer. It's not uncommon anymore to speak with someone who has worked several different companies over the last 10 years all while sitting at the same desk. "We were purchased by a competitor." Terms like "absorbed," "merger," and "spun off" are indicative of the fast-paced corporate world and its tumultuous tendency to show more favor to the bottom line than the people who drive it. If you've participated in a company sponsored plan and your employment has ended (voluntary or not), you likely have a plan just sitting in investment limbo. 

In specific, let's discuss the 401(k). The 401(k) is a tax-advantaged savings vehicle (not a pension) as defined by section 401(k) of the Internal Revenue Code. Tax stuff. Yeah.

The maximum employee contribution in 2015 is $18,000 (or $24,000 for those aged 50 or older due to catch-up contributions). Your employer can make additional contributions up to and totaling $53,000 for any one individual. This is a nondiscriminatory plan which means what you do for one, you must do for all. These plans can have a pre-tax component or after-tax component. Normally, a myriad of investments are available as options for growing your retirement asset to your desired risk tolerance level. (For more, see: Best Ways to Roll Over Your 401(k).)

Knowing what to do with your current plan or former plan can depend on your circumstances. You should always consult a professional tax advisor or financial advisor before making any decision. You may not know what to ask your financial advisor so let's discuss some questions that may potentially bring some light to your 401(k) attic. (For more, see: Can I Roll Over the 401(k) Money from My Old Job into My New Company's Plan?)

Questions to Ask

1) "What are my options?" This is the most important question you can ask. The answer, depending on your desires and circumstances, could be one of the following:

a) Keep the money where it's at if permitted. You'll no longer be able to make contributions but you may change investment options. Option "a" also may allow you to make penalty-free withdrawals based on certain criteria. Check with the administrator as every plan is different.

b) Roll the money into your current work plan if permitted. This will terminate your former plan account and give you some options that are limited to the scope of your current employer sponsored plan. This option gives you control over contributions and investment options once again.

c) Use the money or cash it out. This is an age-based withdrawal and will be subject to any taxes and penalties that may apply. This option can be a very expensive way to use your money.  For example, a withdrawal of $10,000 will be subject to ordinary income tax, let's say in this case is 25% and a 10% penalty and also including 4.25% for the state of Michigan totaling 39.25%. To use your $10,000 it will cost you $3,925. (For more, see: Top Reasons Not to Roll Over Your 401(k) to an IRA.)

d) Roll the money into an IRA. This could mean a traditional IRA or Roth IRA depending on your how your contributions were made. Doing this, an investor opens the door to flexible investment strategies in contrast to the one-size-fits-all structure in a 401(k). Ultimately, the decision is left to the investor. You should always consult your tax advisor and financial advisor to decide which option meets your specific needs. (For more, see 5 Secrets You Didn't Know About Roth IRAs.)

2) "What are the current fees in my plan?" I'm always surprised that people think their 401(k) is "free." I have never encountered an investment that was "free." Investment companies are not investing your money for nothing. DOL regulation 408(b)(2) makes it mandatory for employers to disclose fees, which include investment expense ratios, plan provider fees, administration and other miscellaneous fees, to each participant. 

3) "If I perform a rollover, how will the fees change?" Every investment professional is required by FINRA to disclose the expense associated with each investment in enough detail that the investor clearly understands the obligation. 

4) "Is a Roth conversion something I should consider?" The IRS allows you to convert any amount of your pre-tax retirement assets to after tax Roth contributions. Prior to 2010, only those with an adjusted gross income below $100,000 were eligible for a conversion.

5) "If I perform a rollover, what advantages could I realize?" This should get a conversation going regarding the "why" of the rollover. Every investor should match themselves up with a professional who understands what you're trying to accomplish. An advisor should be discussing with each investor the pros and cons regarding rollovers that are based on the investors specific and current situation. 

The Bottom Line

Your retirement money is important. I suggest meeting with an advisor to see what your options could be. Know your options completely. Meet with your tax advisor. And, as always, don't do anything you're not sure of or uncomfortable with. (For more info, see: 401(k) Rollovers: The Tax Implications.)