401k Rollover Drawbacks

I think one of the most common questions that people ask when it comes to rolling over their retirement funds is what are the 401k rollover drawbacks? The answer to that question depends on where you are rolling over your retirement funds too.

If you rollover to a brokerage IRA, the main drawback to this is cost. With a brokerage IRA, if you place a trade with a broker you will be charged a fee every time that you place a trade. You may also incur a transaction fee to make a mutual fund trade.  There are however some brokerage IRA companies that offer discounted or free brokers.

If you are rolling over to a new employer then one drawback is if you work for a smaller company you may be paying higher plan fees than you would with other retirement investing options.    Another drawback is you lose a lot of flexibility. You are stuck with the investment choices that your company has selected for their plan as well as their rules.  You also cannot access your funds again unless you fit into a small window of allowed circumstances like hardship or disability, you take a loan against your 401k or your employment with the company is terminated, whether by them or by you.

If you rollover to a mutual fund IRA you will have investment minimums to meet.  They often range between $500 and $3000 just to invest into a single fund before you can purchase any shares. You also lose a lot of flexibility.  Just as you are stuck with an employer’s investment options, you are also stuck to what the mutual fund offers. Should you be interested in ETFs, individual stocks etc, you will most likely have to open an account with a brokerage.

Another thing to consider is if you rollover into an IRA account and you have assets worth more than one million dollars and you are considering personal bankruptcy, that money could be taken to satisfy the debts that you have in some scenarios. If you have an employer sponsored retirement plan those assets in most circumstances cannot be taken.  It is best to check with your states bankruptcy laws.  One other drawback is if you rollover to an IRA and whether or not you are working at the age of 70 ½ you are required to being taking distributions.

So as you can see, the drawbacks to a 401k rollover depend on where you intend to move your retirement investments.  Consider each option, weight the pros and cons and if you still are not sure talk to a tax advisor or financial advisor.  They will be able to help you make an educated decision about your 401k rollover.