facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck
%POST_TITLE% Thumbnail

Pros and Cons to Rolling Your 401(k) Over to an IRA

By Jane Young, CFP, EA

When changing employment, you need to decide what to do with your 401(k) plan. In most cases you will have four options including leaving your funds in your previous employer’s plan, transferring the 401k to your new employer, cashing it out, or transferring your funds to a rollover IRA.  Due to the negative tax ramifications, cashing out your plan is rarely a reasonable option. Therefore, the decision usually comes down to leaving it in a 401(k) or rolling it over to an IRA.

Below are ten factors to consider before making a decision:

  1. Investment Options – The variety of investment options will vary between 401(k) plans and some plans have limited options to choose from. Rollover IRA’s have countless options to choose from including stocks, bonds, CDs, actively managed mutual funds, index mutual funds, and exchange traded funds.
  2. Fees – Evaluate the fees associated with administering the plan and managing the funds that are offered. While many IRAs offer low-cost index funds and exchange traded funds, some 401(k) plans offer institutional funds with even lower management fees.  
  3. Convenience – The average worker will change jobs numerous times throughout their career, and it is common for 401(k) plans from former employers to be forgotten or neglected. It may be more convenient to consolidate 401(k) plans from several employers into a single rollover IRA.
  4. Flexibility – Rollover IRAs generally provide more flexibility in when and how you invest your funds and in your ability to take withdrawals from you account.  If you roll your 401(k) over to your new employer’s plan, you will be subject to the new plan’s withdraw rules.  
  5. Loans – You can take a loan against your 401(k) plan as long as you are employed.  A 401(k) plan loan must be paid off before you terminate employment. You cannot take a loan against a rollover IRA.
  6. Delay Required Minimum Distribution(RMD) Until Retirement – Unlike an IRA, you are not required to take distributions from your 401(k) plan while you are working.   If you continue to work to age 73, the current age at which RMDs need to be taken, you do not have to take distributions until you stop working.  
  7. Qualified Charitable Distribution – You have the option to make a tax free distribution to a qualified charity, with all or part of your RMD, from a rollover IRA. You cannot make a Qualified Charitable Distribution from a 401(k) plan.
Creditor Protection – The federal government provides creditor protection on 401(k) plans against most lawsuits. Creditor protection for IRA’s falls under state law. In Colorado, IRAs receive creditor protection up to around $1.5 million, adjusted for inflation. Additionally, IRAs that are rolled over from a 401(k) receive the same protection as a 401(k) plan.   Be sure to keep money rolled over from a 401(k) in a separate rollover IRA account.