A Few Things to Think About Before Rolling a 401(k) into an IRA

Income taxes are due less than two months from now. It’s also the time many Americans contemplate rolling their 401(k) plans into an IRA. But doing so may depend on several important factors.

According to Alec Young, investment strategist at Oppenheimer Funds, the quality of a 401(k) should be the top concern.

“The way you determine that is the fees on the funds,” he said. “Take a look at what the ranges are. Are my funds in the lower end of those ranges? What’s the investment selection like? Am I limited to just a handful or do I have a very broad selection? So once you’re able to determine how competitive your 401(k) plan is, it gives you a better ability to make that decision about whether you want to leave money there or move it into a rollover IRA at a brokerage firm.”

One consideration is the availability of stable value funds, which can be found in 401(k) plans and a few other retirement vehicles but not in IRAs.

“That’s one of the biggest competitive advantages of 401(k)s versus IRAs,” said Young.

Stable value funds generally protect principal investments through an insured “wrap.” It pays some interest as well.

“You’re earning 2% to 3% returns,” Young said. “That’s lower than the historical average because interest rates are so low … Even if you decide to move money out of your 401(k), it might make sense to leave your ‘safe money’ there … In this low rate environment, 2.5% is pretty attractive.”

On the other hand, keeping a 401(k) because it includes a lot of an employer’s stock at a discount may not be the most prudent decision.

“While I think it makes sense to own some—say, less than 10% of your total portfolio—you already have quite a bit of risk with the employer if its business should take a turn for the worse,” said Young. “You’re really just doubling down on that by owning a lot of company stock. We would recommend that people avoid owning 20%, 30%, 40%, or 50% of their retirement funds in company stock.”
 
 
 

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