401(k) Rollover Myths and Urban Legends

I frequently get questions from investors about their workplace 401(k)s. Sometimes the questions are based in fact, other times…not so much. There are more than a few 401(k) Myths out there. I want to talk about a few of these misconceptions and reveal the real truth about them.

Here are a few 401(k) Myths and urban legends:

You must cash out your 401(k) when you leave your employer. That’s certainly a myth and absolutely not true.You can do a rollover of your 401(k) when you leave a job, and it doesn’t matter if you were fed up and walked out or your boss showed you the door. Keep in mind if you do cash out, you are required to pay taxes as well as a penalty. No employer can force this on you.

You must leave money behind in your former employer’s 401(k) plan. This is an urban legend for sure. You have the option of leaving money in your old employer’s plan if you prefer the options you have there. Again, the former employer cannot force you to leave the money their.

You are required to rollover 401(k) money into a new 401(k). This is a myth. You can roll to an IRA or 403(b) 457 plan or Federal Thrift Savings Plan if available by the new employer.

You have to have money in an IRA to roll a 401(k) into it. Urban legend. Most of the time a rollover IRA is established to roll funds from your workplace 401(k). You guessed it, it was opened with a zero balance specifically for this purpose.

You cannot do a rollover because you make too much money or already contributed to the plan this year. This is pure baloney. IRAs do have income and contribution limits, rolling money into one doesn’t trigger any limitations whatsoever. Just because you are contributing to the plan during the year, doesn’t mean if you leave the employer that you cannot do a rollover.

Rollovers are expensive. Not sure where this myth came from. There is no cost to doing a 401(k) rollover in to a new 401(k) or IRA. If you hire an advisor there may be commissions or fees, but not from the act of rolling over the money.

Roth IRA or Roth 401(k) cannot be rolled over, only traditional contributions. Another urban legend. You can do a Roth 401(k) rollover to a Roth IRA. These contributions will continue to be classified as Roth. Traditional contributions will remain classified after a rollover as traditional contributions. So both pre-tax and Roth dollars can be rolled.

Company match and contributions cannot be rolled. Huge myth. Have you ever heard of vesting? The vested portion of the employer’s contributions can be rolled. It’s your money for being there so many years. You may do with it what you want. It doesn’t have to stay with the former 401(k) plan. However, the unvested portion stays with the employer.

Hopefully this is enough clarification for your 401(k) Rollover. Some of this can be confusing and I can see where talking with friends and coworkers you could get some incorrect information. Have you left money in a former employer’s 401(k) plan? If so, call me at (859) 225-2596 so I can help you roll it over.

Please be sure to speak to your advisor to carefully consider the differences between your company retirement account and investment in an IRA. These factors include, but are not limited to changes to availability of funds, withdrawals, fund expenses, fees, and IRA required minimum distributions.