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Financial Security by Design
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e-mail: lingane@post.harvard.edu

Do I Roll My 401k Over to a New Employer?

Congratulations on your new job. I hope it is fulfilling and profitable!

My bias is to roll your 401k account over to a traditional IRA because this provides you more control. For example, you can move an IRA account to another provider if you do not like the investment options or fees whereas you are stuck with whatever the employer plan offers. Other advantages are that

• You can convert a rollover IRA to a Roth IRA.

• You can make withdrawals from an IRA in any amount at any time for any purpose whereas an employer plan will impose limitations.

  Withdrawals from an IRA or an employer plan will be taxable and will usually be subject to federal and state penalties before age 50½. Withdrawals from an IRA - but not an employer plan - may escape penalty if made for education expenses or home purchase. See your adviser for details.

On the other hand, employer plans

• guarantee that the spouse will be named as beneficiary if he/she so chooses. A spouse must formally waive this right, and have their signature notarized, before you can roll the 401k over to a traditional IRA.

• may offer better protection from creditors; it depends on state law.

• may allow loans; it depends on the plan provisions.

• may offer special investment opportunities such as Guaranteed Investment Contracts.

• may be simpler since you have fewer accounts to manage.

CONDUIT IRAs

If you choose to roll your 401k account over to an IRA, you must decide whether to commingle the 401k assets with another IRA or to set up a separate "conduit IRA" account. The sole purpose of a conduit IRA account is to preserve your right to roll the IRA back into an employer plan. I don't see much in this option for the reasons given above and I generally recommend commingling assets since this results in fewer accounts. You may have to insist that you do not want a conduit IRA account, however, since many IRA custodians are reluctant to let you commingle assets.

THE EDUCATION IRA

• Distributions are tax free when used for post secondary education. Should the account balance exceed the educational expenses, the excess can be rolled over to an account for another family member or withdrawn. If the excess is withdrawn, income tax and the 10% pre age 59« penalty apply.
• You can contribute as much as $500 a year per student, which amounts to $7,250 tax exempt after ten years at an 8% growth rate. This won't pay for a Stanford education but it will save at least $500 in income taxes.
• Affluent taxpayers, married with an income over about $150K or single obove about $95K, need not apply.

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