Consider Your Investment Options with D. Paterson Cope: How to Roll Over Your 401k or 403b

When you leave one company and move to another, rolling over your 401(k) or 403(b) plan is the best way to preserve the tax benefits. Rolling over this money into a new account is only half the retirement battle, though, according to financial adviser D. Paterson Cope.

There are a few options you’ll have when you roll over your old 401(k) or 403(b) plan. Here are a few of those investment options.

IRA

A great option to roll over your 401(k) or 403(b) plan is an Individual Retirement Account, or IRA. These plans typically have a much larger selection of investments from which you can choose compared to most employer-sponsored retirement plans.

Through an IRA, you can invest in stocks, bonds, mutual funds, exchange-traded funds, real estate investment trusts, annuities and certificates of deposit. You can choose a self-directed IRA, through which you can purchase commodities, physical property and even leases for oil and gas.

A Traditional IRA works like most 401(k) and 403(b) plans, in that the money you contribute is done on a pre-tax basis. Earnings are then taxed when you withdrawal the funds.

Roth IRAs work the opposite way. You contribute funds post-tax, but the earnings grow tax-free since you aren’t taxed when you make a withdrawal.

To avoid tax penalties, you must roll over your 401(k) or 403(b) funds into the same type of IRA. In other words, if you used pre-tax dollars to contribute to your former plan, your new plan must be a Traditional IRA.

Another 401(k) or 403(b)

Another option is to roll over your old plans into a new one that’s sponsored by your employer. One benefit to this is that you’ll be able to consolidate all of your retirement investments into one account — with the old money you’ve invested on top of the new money you plan to invest.

Another benefit is that the limits for how much you can contribute to these plans are much higher than they are with an IRA. If you plan to work after you turn 72 years old, you can also likely delay any RMD — or Required Minimum Distribution — if the funds are in a 401(k) or 403(b) plan.

As mentioned before, if you choose this option, your investment choices will be limited to the ones your employer-sponsored plan provides.

Cash Out

One option that typically isn’t advisable is a cash out. When you leave one company, you will have the choice to take the amount in your retirement account as a lump sum cash payment.

But, as D. Paterson Cope says, if you do so, that money will be taxed immediately as if it’s ordinary income. You also will likely be forced to pay a 10% penalty for a cash out, unless you’re at least 55 years old and no longer working or 59.5 years old and still working.

While having access to a large amount of cash may seem beneficial to you at first glance, paying immediate taxes at your current tax rate as well as a hefty penalty usually means it’s not worth it.

About D. Paterson Cope

D. Paterson Cope, CFP® is the founder and CEO of Cope Private Wealth, a financial planning and wealth management firm specializing in assisting retirees and people who are about to retire. D. Paterson Cope has been providing financial advice for more than 30 years. He first earned the designation of Certified Financial Planner (CFP) in 1997. When he isn’t working, he enjoys spending time with his wife, Jennifer Miree Cope, and the rest of his family in Mountain Brook.