Investing, Personal Finance, Retirement 

Rollover Question: Go Cash or Keep Shares?

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I just completed the rollover process with my old employer’s 401(k) plan and despite its attempts to use ridiculous acronyms to confuse me, I was successful in getting them to cut me a check (made out to Vanguard) that I will send off to those folks as soon as I get it. One of the questions that I was asked along the way was whether I wanted shares or cash because a portion of my funds were in a company stock fund, which meant that on a rollover I could opt for either shares of the company or just cash. I chose cash – here’s why.

Now that I have a choice… would I still invest? Many employees find themselves forced to invest in the company they work for with either limited 401k options or stock purchasing programs, which means they didn’t willingly invest in the company after evaluating their options. I did have a choice though I found out a few months in that any time you transferred money into the company fund, you couldn’t transfer it out (other divisions in the company did not have this restriction). I don’t begrudge them for this as I should have known and it wasn’t that much money anyway. Either way, I felt that I left the company for a reason and I was rolling my funds out for a reason, so why not just cut the financial ties and move on.

Some institutions won’t roll over shares. Some institutions, and I’m not sure where Vanguard stands on this, won’t accept a roll over of shares and will only deal with cash. I never researched whether Vanguard would accept shares, by opting for cash it wouldn’t really matter either way.

Cash means a check is sent within 2 business days, shares means it will take up to 2-3 weeks to register the shares in your name. I’m a patient enough investor to know that 2-3 weeks isn’t a long time but I’m so a realist and I recognize that a lot of things can happen in 2-3 weeks (including memory loss) and that it isn’t really worth it to go through the trouble just to keep the shares (which don’t amount to much anyway).

Tax considerations… were not a factor for me since everything was in a tax-deferred account but they may be for you. If you keep the shares in your name, you don’t have to pay taxes on the gains until you sell. If you liquidate, you pay taxes immediately. Depending on when the shares were purchased, this can be a significant difference.

Ultimately, I went with the cash, if you couldn’t tell, mostly because I did not have a compelling reason to hold onto the shares. If I really wanted to get the shares, it would’ve been a mere $20 (Vanguard is expensive when it comes to trading) to change my mind.

{ 5 comments, please add your thoughts now! }

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5 Responses to “Rollover Question: Go Cash or Keep Shares?”

  1. mapgirl says:

    I always went with cash option on rollovers too, unless I rolled over with the same provider into a private IRA. (So glad I did this now that Fidelity closed some of their funds.) It’s a good opportunity to rebalance and look into some fresh investment options if you’ve been in moribund investments.

  2. TMT says:

    A possible argument for taking company stock is something called Net Unrealized Appreciation.

    For example, if you have low-cost-basis company stock, you can opt to take the stock out of your 401k and just pay income taxes on the cost basis. Now you own your stock (with original cost basis) outside of your 401k where it’s no longer subject to the 401k/IRA rules.

    You can then utilize other techniques to reduce/eliminate the taxes. Or you can simply sell the stock at capital gains rates instead of typically higher income tax rates if it comes straight out of a 401k or IRA.

    I’ve run this analysis for several clients in the past and have rarely seen this make sense for someone, and I always discourage people from having anything invested in their company stock to begin with, but it’s something to be aware of.

    Here’s a brief explanation and java-based calculator:

  3. Kristine says:

    You mentioned that you were successful in getting them to cut you a check made out to Vanguard. I’m curious as to why you requested a check instead of just having them do the rollover directly to Vanguard?

    In most cases it’s best to do the rollover directly to the new institution to avoid potential problems. For example, some companies will withhold income taxes if you request a check instead of a direct rollover. If this happens, you have to take the amount that was withheld out of your own pocket in order to do a complete rollover, or face tax and penalty on the amount that was not rolled over to the IRA.

    Another potential problem is that you only have 60 days to complete the rollover if you receive a check. Although 60 days seems like a long time, if something happens (check is lost in mail, you have a family emergency, etc.) and you don’t get the rollover completed in the required timeframe, you’re subject to penalties and taxes.

    Just a couple thoughts…

  4. jim says:

    I had no choice, my 401k provider would only send me a check and couldn’t send it directly to Vanguard. 🙁

    I totally agree… given the choice, definitely let them handle it.

  5. aua868s says:

    i would rather go for shares instead of cashing it out.

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