Reasons Not to Roll Over a 401k

As I mentioned recently, after leaving a job, the best route is almost always to roll over your 401(k) into an IRA. There are, however, a few specific situations in which it doesn’t make sense to rollover a 401(k)–or other employer sponsored retirement plan–after leaving your job.

Are You Between Ages 55 and 59½?

If you are “separated from service” (i.e., you quit, were laid off, etc.) at age 55 or later, distributions from your 401(k) will not be subject to the 10% additional tax that normally comes with retirement account distributions before age 59½.

As a result, if:

• You are 55 or older when you leave your job, and
• You plan to retire prior to age 59½

…then it may make sense to keep your money in your employer-sponsored plan rather than rolling it over.

Have a Lawsuit in Your Near Future?

From what I’ve read, assets in an employer-sponsored retirement plan receive better protection than assets in an IRA in the event of a civil lawsuit against you. As a result, if you foresee a possible lawsuit in your future, it may be wise to hold off on rolling over your 401(k) until such concerns have passed.

(Full disclosure: I couldn’t be less of an expert on this particular topic, so please be sure to check with someone more qualified than myself–an attorney, for instance.)

Does Your 401(k) Include Employer Stock?

If your 401(k) includes employer stock that has significantly appreciated in value from the time you purchased it, you’d do well to speak with an accountant before rolling over your 401(k). Why? Because the “Net Unrealized Appreciation” rules may allow you to take that stock and move it into a taxable account while rolling the rest of the account into an IRA.

Why would such a maneuver be beneficial? Because if you roll the stock into a taxable account, when you sell it, the gain will be subject to long-term capital gain rates. In contrast, if you roll the stock into an IRA, when you eventually withdraw the money from the IRA, the entire amount will be counted as ordinary income, and will be taxed according to your ordinary income tax bracket at the time of withdrawal.

But In Most Cases…

As you can see, the situations in which it makes sense to not rollover a 401(k) are quite specific. For the overwhelming majority of investors, the answer is “Roll it over, and get it done sooner rather than later.”