Tahoe-Truckee Market Beat: When leaving a job, should you roll over or not?
November 10, 2015
Most Americans have a substantial part of their net worth in their retirement account. For many people, their retirement account is their second largest asset behind the equity in their home. If you're changing jobs one decision you must make is whether or not to rollover your retirement plan.
Typically when you leave your job, you have a few choices — leave your 401(k) where it is, roll into your new employer's plan, or roll it into a self-directed IRA.
For people who change jobs often, leaving the plans behind can cause confusion and complexity for beneficiaries in the event of your death. By consolidating your accounts and rolling into your new plan or an IRA, it will be much simpler for your survivors.
I have personally seen cases where beneficiaries have had a very difficult time uncovering old retirement plan assets that were left behind.
A couple of potential advantages to rolling into a self-directed IRA include superior diversification and expenses. A self-directed IRA account will allow much more investment flexibility than a 401(k) so you'll be able to purchase individual stocks, bonds and have access to any mutual funds available.
Greater investment options will allow for further diversification and enable you to control your expenses. Investment expense is a very important component of long-term performance and needs to be understood. It's critical to understand the expenses you pay in your retirement plan.
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It's also important to understand how your funds are protected in the event of a lawsuit or bankruptcy. If you're facing financial difficulties and have to consider filing bankruptcy, your retirement accounts do offer some protection.
Recently the US Supreme Court ruled that IRAs have protection from creditors under federal bankruptcy law. They haven't clarified the amount in an IRA that is protected, saying that funds deemed to be "reasonably necessary" for financial support are covered.
Prior to the Supreme Court ruling qualified retirement accounts were protected from creditors. To be considered qualified retirement plans had to be set up under ERISA, the Employee Retirement Security Act. Employer sponsored plans like 401(k)s and 403(b)s meet ERISA requirements and are protected. 457 plans are also covered.
State laws vary widely; some states have much better laws for protecting IRA assets than others. The laws also differ depending on whether you have a traditional IRA or a Roth IRA.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.