This is the second in a four part series designed to help you determine the best way to proceed with your previous employer’s company retirement plans, including 401(k)s, 403(b)s and more. Part 1 | 2 | 3 | 4
Are you one of the many people that still have company retirement plans (401(k)s, 403(b)s, etc.) held at your previous employer(s)? As with all decisions we face, the decision to rollover a company retirement plan must be done with adequate information and disclosure so that you know in detail all of the advantages and disadvantages related to each possible choice. With that in mind, lets discuss the pros and cons of keeping your retirement funds in your previous employer’s 401(k).
1.) Does your 401(k), or other company retirement plan, have individual company stock held within it? If so, keeping your 401(k) at that company could potentially offer preferential capital gains tax treatment. Typically, when we take a distribution from a retirement account, the funds distributed are taxed as ordinary income (typically a higher rate). However, company stock is handled differently and when distributed from the retirement account is currently taxed as a long-term capital gain. As the current capital gains tax rate is 0% or 15%, depending on your income, you could have this stock taxed at a lower rate. An important fact to remember though, this advantage is only relevant if there are in fact material gains to be had in the stock.
This benefit can also be maintained if you select a rollover as well, but must be done at the time of the transaction.
1.) General management expenses in 401(k)s are almost always higher than those of traditional IRAs (Individual Retirement Accounts). Your actual costs will vary depending on your specific plan, but according to the Investment Company Institute, management expenses generally range between .35% of assets to 1.72% of assets, with 1.5% a year near the industry median. These fees cover expenses related to administration fees, management fees, lawyers, etc for your company’s plan.
2.) Transaction costs are another expense that are typically higher than those of traditional IRAs (Individual Retirement Accounts). Transaction expenses are charged if your retirement plan is “open”, or allows you to choose which securities to buy or sell within your 401(k) . This cost is generally higher in 401(k)s because most plan sponsors are not associated with discount brokerages that may offer lower commission rates. Transaction costs within your 401(k), when applicable, generally range from $19.99 to $50.00 per transaction.
3.) Only limited investment options, generally only 5 to 15 funds, are typically offered within most company plans. With the limited selection, you may not be investing in the funds appropriate for you based on risk, underlying investments, overlap, expenses or other factors.
4.) You cannot choose the plan sponsor, custodian and/or the person responsible for managing the funds.
Because every personal financial situation has a significant number of variables, it is important to remember that your situation may be different. The only sure way to answer the question for yourself is to conduct necessary research or speak with a professional, Fee-Only Financial Planner whose compensation won’t change depending on their recommendations. Callahan Financial Planning Company only has Fee-Only Financial Planners.
Read part three of our series, Should I Convert My Retirement Account(s) to an IRA?