Q&A: Rolling over a 401(k)


Handling investments after a job switch.

Q: I have a 401(k) from a previous employer that I never did anything with when I left. It's doing pretty well even though I no longer contribute to it. Should I roll it over into a Roth IRA? Or leave it alone?

Your first step is to analyze the investment options available in that 401(k), says Joe Kain, CFP, owner and president of Sunflower Asset Management in Lenexa, Kan. You have a limited number of options, so it's probably best to roll the proceeds into a self-directed IRA. If you're satisfied with the investments you hold now, Kain says, you can transfer them "in kind" and continue to let them ride in the new IRA. The transfer is a tax-free exchange.

Joe Kain

"Moving the money means you have more flexibility and control over your investment," Kain says. "If you sell one of your carried-over mutual funds, you can invest in almost anything, such as individual stocks, exchange-traded funds, other open-end mutual funds, commodity or currency plays, and so on." You also avoid a potential problem: If you leave your assets in your current 401(k), the plan administrator might change the investment options in a way that's not satisfactory to you.

Kain says some financial planners advise against rolling your 401(k) into an existing IRA but rather keep it "segregated" in its own IRA. Why? If you commingle your accounts, you don't have the option of rolling a portion of the funds into a 401(k) with a new employer. "But I wouldn't worry about this issue," Kain says. "I haven't yet seen a situation where I'd advise rolling back out of the IRA and giving up multiple investment options."

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