Roth Rules for Retirees: When to Rollover

To rollover or not to rollover: That’s the question for millions of people who change jobs or retire in any given year. They must decide what to do with their defined-contribution retirement plans like 401(k)s, 402(b)s or 457(b)s.

The issue has always been complex, but now it’s even trickier for people who will have access to Roth IRAs after the first of the year repeal of the $100,000 income limit on “rollovers.”

In most cases there are four options: Leave your money in the former-employer’s 401(k) or similar plan, transfer it into the new employer’s or shift the money into a traditional or Roth IRA.

All but the Roth option can be done without triggering income tax. The Roth move can be expensive because of the upfront tax bill, but it may pay off in the long run, since Roth withdrawals are tax-free.

Here’s a quick run-down on the pros and cons of each move.

Keep the old plan. If you have at least $5,000 in the old plan, you can just keep it there, which is obviously the easiest option. It’s a good approach if you are happy with the plan’s investment offerings, especially if any aren’t available outside the plan. Note that once you leave the firm, you probably won’t be allowed to borrow against your plan assets or make new contributions. You’ll probably have to roll over to an IRA if you have less than $5,000 in the plan.

Shift your money to the new employer’s plan. This is a good choice if you like the new employer’s investment options or want to be able to borrow against plan assets. (Loans can severely damage investment gains.)

Shift to a traditional, tax-deferred IRA. Although you won’t be able to borrow against your account, an IRA rollover would give you virtually unlimited investment options, compared to one or two dozen mutual funds in the typical employer plan. You could invest in individual stocks or bonds, for example. A move to a traditional IRA (or a Roth) might allow you to choose investments with smaller fees than you’d pay in the employer plan.

If you liked this article you might like

Why You May Not Want to Pay Cash, Own Your Home Free and Clear

Now You Can Get That Home Equity Loan in a Comfortable Hybrid

If Retirement Health Care Costs Look Scary, Try These Tactics

Why Buying Bonds With Negative Yield Isn’t as Weird as It Sounds

Investors Turning to Dividend-Paying Stocks See Benefits of Buybacks, But Must Heed Caveats