When switching jobs, roll 401(k) into an IRA

Switching jobs is always stressful.

The last thing you want to worry about when making that kind of change is how to handle your retirement account.

Such is the dilemma facing this week's letter-writer, Susan.

"I was wondering if you could help me make a decision as to which (individual retirement) account to put my retirement money in," she wrote in an e-mail. "I recently changed jobs, and I had heard that it would be a good idea to roll over my previous company's 401(k) into an IRA account, rather than rolling it over to my current employer's 401(k).

"I heard Suze Orman say that it would be good to put it into a traditional IRA rather than a Roth at the beginning, but I'm not sure. What would you recommend for this?"

For a recommendation, I contacted Jeff Salisbury, principal at Independent 401(k) Advisors, a fee-only advisory firm with offices in Cache and Davis counties.

Jeff says he is a "big fan" of rolling 401(k) funds into a traditional IRA when changing jobs. Doing so, he says, is an issue of control.

"When you get the money into a 401(k), you're stuck there until you terminate jobs," Jeff says. "You don't know if the new company has a good 401(k) or a bad 401(k). If you roll it into an IRA, you have complete control. ... You don't have to terminate your job to terminate your IRA provider if you're dissatisfied."

He says Susan should look for an IRA provider that will let her invest in a broadly diversified, low-cost, low-expense-ratio, low-turnover mutual fund.

"The quality of 401(k)s is so broad," Jeff says. "There are great ones, and there are a lot of really bad ones. The bottom line is, it's a matter of quality control."

Regarding the question of choosing a traditional or Roth IRA, it is a matter of taxation.

"If she were to put it into a Roth IRA, she's taking money from a 401(k) that has never been taxed, and the money that goes into a Roth is always taxed first, so that would trigger a tax event for her," Jeff says.

"Let's say she's rolling over $100,000. She would be forced, in the year she converts it to a Roth, to realize an additional $100,000 in income for the year, on top of what she earned. There would need to be some real justification to do that."

He likes this motto about taxation: "You delay. You delay. You delay. And then you put off and put off and put off."