When You Should NOT Rollover Your Old 401(k)

As advisors, we are often asked about Rolling over your 401(k) to an IRA. This is a financial decision that should be made carefully, as there are situations when it may not be advisable to do so. There are plenty of reasons why you should complete the rollover, but here are some scenarios when you might consider NOT rolling over your 401(k):

• You Want to Take Advantage of the Rule of 55: If you retire or leave your job in the year you turn 55 or older, you can take penalty-free withdrawals from your 401(k) without the usual 10% early withdrawal penalty. This is known as the Rule of 55. If you roll over your 401(k) into an IRA, you won't be able to take advantage of this rule.

• You want to utilize a Mega Backdoor Roth IRA strategy: This strategy allows individuals to contribute substantial amounts to a Roth IRA beyond the standard annual limits, potentially leading to tax-free distributions in retirement. Maintaining a 401(k) preserves the segregation of  pre-tax contributions from post- tax contributions. You can ream more here: Exploring the Mega Backdoor Roth Strategy for Enhanced Retirement Savings | Sevey Wealth Advisors

• Your 401(k) Offers Unique Investment Options: Some 401(k) plans offer access to investment options that are not available in IRAs, such as employer stock or certain institutional funds. If you have a strong belief in the performance of these unique investments, you might consider keeping your money in the 401(k).

• You Have Outstanding 401(k) Loans: If you have outstanding loans from your 401(k), they may become due immediately if you roll over the account. Failure to repay the loans could result in taxes and penalties.

• You Want Creditor Protection: 401(k) plans have some level of protection from creditors under federal law. Depending on your situation, keeping your money in a 401(k) might provide better creditor protection compared to an IRA. This is especially true for clients who are in a highly litigious field (example: Doctors) or those with rental properties. While Texas does offer creditor protection for IRA’s, not all states do. If you plan to retire out of Texas (even part time), maintaining the 401k is a simple form of protection.

• You Plan to Work Past Age 72: Required Minimum Distributions (RMDs) typically begin at age 72 for IRAs, but they don't apply to 401(k)s if you continue working for the employer that sponsors the plan. If you intend to work beyond age 72 and want to avoid RMDs, keeping your money in the 401(k) might be beneficial.

It's essential to carefully evaluate your individual circumstances before making any decisions regarding your 401(k) rollover. The decision should align with your long-term financial goals, tax situation, and retirement plans.

If you have questions and want to know more about your options with an old 401(k), please reach out to schedule an appointment. At Sevey Wealth, we are a Wealth Consulting firm. We partner with you, bringing you the latest portfolio and tax analysis software as well as over 23 years of experience for you to leverage.

Our goal is simple: Help you manage your own wealth, save you money and give you more control to enhance your financial future.

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