If you’re an executive with 401(k) accounts from previous companies, you probably know you should do something about them. Add equity compensation to the mix, and this choice becomes even more important.
But when you’re focused on leading teams and achieving business outcomes, these personal financial decisions often get pushed down the priority list.
Industry research shows there are roughly 29 million forgotten 401(k) accounts nationwide,1“The True Cost of Forgotten 401(K) Accounts (2023).” Capitalize, 14 June 2023, www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks. and we see this regularly with new clients. People tell us, “Oh, I haven’t looked at that account in years,”. The result? Missed opportunities for growth, tax inefficiencies, and added complexity when planning around equity events and retirement goals.
Why Rollover Timing Affects Your Tax Strategy
Rolling over your 401(k) isn’t just about consolidating accounts. This choice directly affects your current and future tax planning, particularly when you’re managing stock options, RSUs, or other company equity.
When we step back and look at your full financial picture, we often find that multiple retirement accounts, across various providers, can create alignment challenges, the kind that can quietly end up costing you money in ways that aren’t immediately obvious.
The reality is that different account types come with different rules around taxation, withdrawals, and required minimum distributions. If those don’t align with your equity vesting or liquidity plans, you could unintentionally push yourself into a higher tax bracket or miss key planning opportunities.
Coordinating Asset Allocation Without Creating Tax Drag
One of the often-overlooked benefits of consolidating and coordinating your retirement accounts is the ability to manage your overall asset allocation more effectively without triggering unnecessary taxes.
When your qualified and non-qualified accounts are reviewed together, we may recommend building a single unified investment asset allocation strategy that respects your risk tolerance, goals, and timelines. But here’s where it gets tactical:
- We use qualified accounts, like IRAs (individual retirement accounts) or 401(k)s, to make most of the rebalancing moves (realigning the investment allocation), since trades in these accounts don’t trigger capital gains taxes.
- This allows you to preserve the unrealized gains in your non-qualified (taxable) accounts, avoiding unnecessary tax hits that could erode returns.
In short, your retirement accounts become a tax-efficient tool to help you maintain discipline around investment strategy, without needing to liquidate appreciated securities in your taxable portfolio just to rebalance.
This coordinated management approach helps you keep your intended portfolio strategy intact, while also managing the timing and amount of taxes owed across your total balance sheet.
Your Four Strategic Paths Forward
Here are the four strategic options for what to do with your old 401(k):
Leave it with your former employer
This could work well if your old plan has exceptional investment choices and low fees that you can’t access elsewhere. Some large companies offer good, low-cost investments. However, you won’t be able to add new money, and you’ll have one more account to track as your career progresses.
Roll into your new employer’s plan
This approach works well if your current plan offers solid, low-cost investment options and you value simplicity. We always review your current program before recommending this though, since some plans have more limited selections than others and potentially higher fees.
Rollover to an IRA
This usually gives you the most investment choices and the most flexibility for coordinating with your other financial strategies. For professionals with complex situations involving company equity, this often offers the best opportunities to coordinate things properly from a tax perspective.
Pro-tip – Before proceeding with a rollover, discuss with your financial advisor whether this is appropriate for your situation, taking into account the state where you live (as IRA creditor protections vary by state and may be weaker than those for 401(k)s in some cases) and any potential exposure to creditors through lawsuits, which could put your retirement funds at greater risk if not carefully evaluated.
Convert to a Roth IRA
You’ll pay income taxes on the amount you convert, but this can be powerful if you expect to be in higher brackets later or want to pass money to your family in a tax efficient manner. The key is timing the conversion with your overall taxable income, including equity compensation, to manage the overall tax impact.
How Our Team Coordinates Your Equity Compensation and Retirement Planning
At the end of the day, the right choice depends on how these elements work together for you. That’s why our team-based analysis proves so valuable.
Consider someone evaluating a Roth conversion from their former employer’s plan for example. From a basic tax perspective, it might appear to have potential benefits. However, when we map out upcoming stock option exercises and restricted stock vesting schedules, we often identify potential timing conflicts that could affect your overall tax situation.
This is where having a team really makes a difference. When multiple moving pieces are involved with 401(k) rollover tax implications, equity compensation timing, and investment coordination, having different perspectives helps catch things one person might miss.
Our process is designed to help you understand the trade-offs, not just receive recommendations. Whether it’s timing a Roth conversion around your equity vesting or using your IRA to rebalance without triggering capital gains, we build every move into a coordinated plan that considers all parts of your financial picture.
Taking Your Next Step: From Analysis to Action
If you’re ready to organize your old 401(k), we usually start with straightforward decisions while analyzing accounts that might offer unique advantages.
For individuals with substantial equity compensation, we strategically coordinate your 401k rollover options with the rest of your financial plan, including tax management strategies like equity compensation planning and rebalancing your non-retirement investments to help manage your overall tax burden. l. The objective isn’t necessarily to make perfect decisions immediately, but rather to make smart choices that support what you’re working toward financially.
The approach you take to your rollover strategy tends to shape how smoothly your tax planning works over time. What starts as organizing old accounts often becomes the foundation for better financial decisions as your career progresses.
That’s the difference between handling this alone versus working with a team that understands how executive compensation and retirement planning connect. Our clients find they’re better prepared for opportunities instead of constantly reacting to market changes.
Our “Big Decision Clarity” meeting helps you understand how this coordination works. Whether you’re a current client or exploring how we might work together, we can walk you through your options and ensure you’re comfortable with whatever path forward works best for you. Schedule your call to get started.
About the Author
Karl Schwartz, CPA, CFP®, is a Senior Financial Advisor at Team Hewins with four years of public accounting experience in individual tax planning. He specializes in easing financial stress and guiding clients through major life transitions.
Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein.
- 1“The True Cost of Forgotten 401(K) Accounts (2023).” Capitalize, 14 June 2023, www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks.