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Should You Rollover Your 401(k) or 403(b)? 3 Steps to Making the Right Choice

Kevin Burkle, CFP, CSLP
July 30, 2020
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As the son of a retired nurse and the spouse of a working ICU nurse, I know firsthand the amount of hard work and compassion it takes to choose nursing as your profession. Naturally, I have always had a soft spot for nurses for obvious reasons. 

As a Certified Financial Planner who works exclusively with healthcare professionals, I believe nobody deserves financial wellness more than those who have dedicated their professional lives to helping others. 

However, I have come to learn that there is a serious lack of available resources to help nurses make smart financial decisions (decisions that must be made if you want to retire wealthier than a doctor). So today, I aim to address the question I get asked most often by my nursing family and friends who know I’m a financial advisor.

(And don't forget to sign up for Trusted's upcoming nursing financials series! RSVP to the first virtual event of the series, "Budgeting for Nurses!")

“What should I do with my old 401(k) or 403(b)?”

Unfortunately, there is no simple answer. However, if you follow the steps below you can make sure you are making the best possible decision for your hard-earned retirement savings.

(Retirement counts are very important, and if you haven’t brushed up on your knowledge of how they work, here’s a simplified guide to nurse retirement.)

*When it comes to employer sponsored retirement plans, 401(k)s and 403(b)s generally follow the same sets of rules, so for the purposes of this article we will simply refer to them as 401(k)s.

two people sitting in beach chairs watching the sunset nurse 401k 401b nurse retirement

Step 1) Make sure you are in the right frame of mind when making this decision

If you find yourself wondering what to do with your retirement account because you just recently left your employer either voluntarily or involuntarily, odds are you have a thousand things running through your mind. 

In my experience, this can cause one of two things to happen. Some people end up making a snap decision without researching what is best for them simply because it is easiest and takes the least amount of time. Others delay making any decision at all because their mind is preoccupied with numerous other concerns due to the job change. 

Soon enough they have forgotten about the account and it ends up sitting there for years when there is a real chance they would have been better off rolling it into another employer sponsored retirement account or an IRA. So, if you are in this position, set an actual calendar reminder for a few weeks down the road to research your options. 

It is perfectly OK to do nothing with your account for this amount of time and this will give you an opportunity to get in the right state of mind and make sure you give this decision the proper amount of consideration it deserves. 

Step 2) Understand Your Options

Generally speaking, you have four options:

  1. You can cash it out and pay applicable taxes and penalties on that amount.
  2. You can continue to leave it in your old employer’s retirement plan as long as it meets the plan minimum amount which is usually $5000.
  3. You can roll it over to your new employer’s 401(k) plan without having to pay taxes.
  4. You can roll it over into a personal IRA without having to pay taxes.

The best way to choose which option makes the most sense for you is to compare the costs, resources, and plan features of your 401(k)s to IRAs.

Step 3) Understand your 401(k) plan features

There are a few things to consider when comparing your old 401(k) plan features with those of your new 401(k) or an IRA.

Investment choices and fees

Every 401(k) has its own unique menu of investment options that you can invest your money in. While every plan by law is required to provide enough choices to enable you to be properly diversified, the costs associated with these investments can vary quite a bit from plan to plan.

The better plans will offer a wide range of low cost, index-based investment choices. The lesser plans will only provide a small selection of actively managed mutual funds whose underlying costs can be as much as five times the costs of index funds. 

Some plans even have what are called institutionally priced funds. This is a good thing.This means you are getting a group discount on the expense of owning that fund as compared to owning the same exact fund in an IRA. If your old plan has a wide range of these inexpensive funds, you may be better off keeping your money there instead of rolling it into a new 401(k) or IRA with higher investment costs. 

If you aren’t sure if your plan offers these funds, all you have to do is ask. Call your 401(k) service provider and ask them if your plan offers index and institutional funds. On the flip side, in some cases the costs may be lower in an IRA depending on which firm you invest your IRA with. 

Resources for helping you manage your portfolio

Many financial advisors will try to sell you on rolling over your 401(k) to an IRA through them because they say they can “manage it better for you, “ but you must ask yourself what that even means. Are they saying they can consistently beat the market indexes over the long run? The majority of studies on this type of active investing prove this is highly unlikely, and you will most likely pay higher fees for this service in an IRA.  

What some financial advisors may not want you to know is that many 401(k) plans provide either free or inexpensive tools and resources for helping you manage your portfolio with them. This could include the ability to speak with a live rep who can provide you a recommended asset allocation or even a model portfolio that you can easily replicate yourself. 

Some also offer ongoing professional management at a relatively low cost as compared to what you would pay for a similar service through a personal IRA provider. If having this type of help is important to you, ask both your past and current 401(k) service providers what types of resources they offer for helping you manage your portfolio and how much they cost, and then compare. 

Typically, the fee for having an IRA portfolio professionally managed is around 1% of the assets under management. If you have access to a 401(k) plan that offers a similar service for a much lower fee, you may be better off keeping your money in that 401k.

Distribution options

Not all 401(k) plans offer flexible distribution options. For example, once you separate from your employer, you can no longer take money out of the plan as a loan. You may also be faced with what is called a full payout only plan. In this type of plan, once you take any money out of your inactive 401(k), you are forced to take the rest out at the same time. You either must cash out the rest as a taxable distribution, or rollover the rest to another 401(k) or IRA. 

Generally, an IRA is more flexible in that you can withdraw whatever amount you need, whenever you need to, as long as you are willing to pay the applicable taxes on the distribution. If you think there is a chance you may need to access any of the money in your inactive 401(k), you need to determine what types of withdrawal options are available in your plan.  

As you can see, there is a lot of due diligence required when determining what to do with an old 401(k) or 403(b). There is no one size fits all solution. The important thing to remember is that you are the best person for deciding what is in your own best interests. 

There are a lot of conflicts of interest involved when seeking advice from a financial advisor on rollovers. If you take this approach, make sure that advisor is an actual fiduciary who is willing to work with you whether you roll your account over to their firm or not. Educating yourself is the best protection against being taken advantage of and for getting the most out of your account.

Create a free Trusted profile for more resources on nurse financials, tips & tricks, and access to your own Nurse Advocate.

Kevin Burkle, CFP, CSLP

Kevin is a Certified Financial Planner, and as the son of a retired nurse and the spouse of a working ICU nurse, he knows firsthand the amount of hard work and compassion it takes to choose nursing as a profession. He works with all types of medical professionals regardless of current financial status. His goal is to help medical professionals work toward defined short and long-term goals like paying off student debt, saving for a house, and planning and investing for retirement.

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