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The Pros and Cons of a Rollover

Video Transcript

A rollover is the process of taking funds from an old retirement account at a previous job, things like 401ks, 403bs, or 457s and then combining them into one new account. This new account could be the 401k at your new job or into an IRA that you just opened up on your own. A rollover can be a great way to just consolidate all of your retirement savings into one place, just to make things easy, but we have to ask ourselves; Is this a good idea?
Let's break down some of the pros and cons of a rollover and I want to start first with the pros. Before I do it's important for me just to let you know that once you leave your job you can no longer contribute to those retirement accounts. I mean you can still go in and manage that money and make withdrawals you just can't add any new funds.
All right so I just want to give you that disclaimer first, so now that we got that background out of the way let's jump into the first pro and that is a rollover just makes things simpler. I mean it's possible that over your career you could end up with several retirement accounts each with their own set of investment options, a different website, a different password to get into that website and a different balance in each account. And if you want to know how much that you've saved in all of these accounts combined, you'll probably need to break out a notepad or maybe set up an excel spreadsheet and add it all up. You know as much as I love using Excel, I doubt that most of you out there share the same passion, so performing a rollover really just allows you to consolidate all of those accounts into one location. When you login, you can see everything after that rollover has been completed and you can get a full picture of your time in progress. You can update your investment options, all at one time, in one location.
Pro number two, performing a rollover will allow you to make sure you don't lose track of any of your hard-earned savings, because as I mentioned, you'll probably end up with several different retirement accounts over the decades.
That will be your career and the process of leaving one job and then going and starting another one can be stressful enough, so it's completely understandable that you might just lose track of an old 401k plan. During that whole process you may say to yourself; well, you know after I get settled in this new job then I’ll go back and figure out what I need to do with that old retirement account. But as it usually does, you know life happens and you get distracted and then you just completely forget.
So, let's say you're 25 years old when this happens, then 20 years later, you're 45 you're starting to get serious about thinking about retirement and planning, so at that point in time it's highly possible that you've just completely forgotten all about that retirement account and especially if you only put a few thousand dollars in.
Because when you were younger, you didn’t have much money available and additionally it's extremely common for companies to just change retirement plan providers. Even if you do remember about this account, it may be held with a completely different company by the time you do and if you haven't kept up with this account over time you might even have no idea where to find it. Maybe you didn't even see an email or a letter show up. So, imagine the headache when this happens with several different retirement accounts and then having to go and call each HR department from all of your old employers, and hopefully they're still in business when you do, just to find out where these funds are. You know I'm stressed out right now just thinking about what this process would look like.
Rolling over your old retirement account, into something like an IRA that you can just open up on your own, allows you to make sure that you never lose track of your money.
I want to wrap things up here with the third and final pro, as to why rollover might be the right decision. That would be fees, each retirement plan is in control of setting their own fees and there's really no consistency in these fees whatsoever. They can charge whatever they want and this can cause fees to range wildly from one account to the next. So, it is a very real possibility that your old retirement account has high fees compared to your new plan. If you find yourself in this situation, rolling over your old retirement account could save you a significant amount of money over your working career.
Now that we've covered some of the pros let's take a look at some of the cons. A rollover isn't a mandatory thing that you have to do, if you want you could choose to just leave those accounts where they are. One of the reasons why you might want to do that is con number one: your old retirement plan was better, so as I mentioned, these can vary a lot from plan to plan. So just as it's possible that your old retirement plan had relatively high fees, it's also a possibility that you are leaving a job with a really great retirement plan with some low fees and a lot of solid investment options.
If your new 401k is going to charge you significantly higher fees, this could be a situation where you wouldn't want to roll over that old retirement account into your new one. But as I've mentioned this before, keep in mind that you can't add any more money to that old account, however this doesn't mean that you should just keep that old retirement account forever. It just means that it might be a better idea to wait and find a better option, like rolling the funds over into an IRA with lower fees and the work option that you have available to you now.
The second and final con that I have for you is based around a penalty loophole and I know everyone loves a good loophole. This loophole applies to a very particular group of people, in a very specific situation so this is not going to work for everyone. But retirement plans do have a set of rules in place to not only encourage you to save, but to also discourage you from pulling funds out of these accounts.
If you are under the age of 59 and a half, you would typically pay a penalty on any money that you take out of this account. Now there are some exceptions to this penalty, but they may not apply to you in your situation, so here's where that loophole comes in. If you were to quit, be laid off, or fired from your job and you were between the ages of 55 and 59 and a half, you can withdraw those funds from your 401k, or your 403b plan penalty free.
However, if you were to roll those funds over into something like an IRA, then you would lose this benefit and you'd have to wait until the standard age of 59 and a half.
So, there you have it, those are some pros and cons of a rollover. I want to know, have you ever rolled over any of your old retirement accounts? If so, I want to know how was your experience and then let me know if you found out any pros and cons along the way.