You’ve been working hard and saving for retirement, and now, you’re joining the roughly 10,000 Americans reaching retirement age each day. Now the question becomes, “What to do with that employer-sponsored 401(k)?” Does it make sense to leave the money in your former employer’s plan, or does it make sense to consider rolling it over into an individual retirement account (IRA)? In this case, an IRA rollover would involve taking the money from your current employer-managed fund and putting it into an IRA.
However, there are more than just two options when deciding what to do with your employer-sponsored 401(k) when you hit retirement age. In fact, if you’re thinking about an IRA rollover, there are six options.
Six Options When Considering A Rollover
1. Rolling your money into an IRA: You could do a straight IRA rollover, which would give you more control over your investments.
2. Leaving it in the company plan: There may be reasons to leave your money at the current employer, such as if you plan on working past age 70 and 1/2.
3. Rolling it into a new company plan: Maybe you are continuing work at a new company. If so, one option would be to roll your 401(k) money into your new company’s 401(k) plan.
4. Taking a lump-sum distribution: You also could cash out your 401(k) entirely and pay the tax now, which sometimes makes sense depending on tax planning.
5. Converting it into a Roth: You could pay the tax and invest in a Roth, which would allow you to grow the post-tax money tax-free.
6. Doing an in-plan Roth conversion: Some employers offer Roth options as part of their employer plan.
Reasons To Roll Your 401(k) Into An IRA
There are six reasons why you might want to roll your 401(k) into an IRA.
1. The ability to stretch the IRA for beneficiaries: Deferring paying tax on qualified accounts, then allowing your beneficiaries to stretch out the taxes over their lifetimes, especially through a trust, is a great tax planning strategy. By rolling over the 401(k) into an IRA, you will have this ability. If you leave the money with your employer’s plan, your plan administrator may not allow for the tax to stretch over your beneficiaries’ lifetimes.
2. Estate planning options: By rolling over into an IRA, you are now free to name a trust as a beneficiary. If you were to leave the money in your employer’s plan, the plan administrator may require that only individuals, not trusts, be named as beneficiaries of the tax-qualified account.
3. More investment options: By leaving money in an employer-sponsored plan, you are stuck with the investment options of that company. Using an IRA opens the whole world of investment options to you versus being limited to the investment options inside the 401(k).
4. Consolidation of accounts and control: By rolling over a 401(k) into an IRA, you have the ability to exert more control over the number of accounts you have, and you would be able to combine with your other IRA accounts if you’d like.
5. Required minimum distribution (RMD) simplicity: With the consolidation of a 401(k) into an IRA, you will only have one RMD calculation instead of the two you would have if you had kept money in both a 401(k) and an IRA.
6. The ability to split IRAs for charitable reasons: A 401(k) cannot be split into separate accounts, but an IRA can. This is helpful if there are IRAs you want to leave to charity or for other purposes. Sometimes having one IRA for the children and one IRA for the grandchildren makes sense in terms of stretch IRA planning, as well, so split IRAs can be beneficial not just for charitable planning.
Reasons Not To Roll Your 401(k) Into An IRA
Not everyone should automatically roll their 401(k) into an IRA, though. Here are four reasons why you might want to leave your 401(k) in your employer’s plan.
1. Federal creditor protection: 401(k) plans are covered under federal rules under the Employee Retirement Income Security Act of 1974 (ERISA). Due to ERISA, these plans are protected from liability in bankruptcy and divorce, according to federal law. However, IRAs are covered by state rules that may or may not have the same protections as covered by federal law. That said, typically, IRAs are protected in bankruptcy court (though inherited IRAs are not).
2. Loss of plan loans: Some employer plans allow for in-plan loans based on the 401(k). If there are loans still in play, then a rollover probably should not be attempted. The loan should be paid back first.
3. Loss of plan life insurance: Some employer plans allow the purchase of life insurance inside the plan. While rare, this is a nice feature available with some 401(k) plans.
4. Delaying RMDs while working: One of the best reasons not to roll over an IRA would be if you plan to work past age 70 and 1/2. By leaving the money inside your company plan, you can delay when you must take your RMDs. This option is not available in rolled-over IRAs, though.
Bonus: One Reason That Should Not Factor Into Your Analysis
One of the reasons some investors do not want to roll over their 401(k) into an IRA is because they like how the investment is performing inside the 401(k). Is this a valid reason? Probably not, because whatever investment is inside your 401(k) could also be invested inside an IRA, so that is really a non-issue.
Should You Roll Over Your 401(k) Into An IRA?
It depends. Everyone’s situation is different, and there are many factors not listed here that should be taken into account, such as your income, assets, goals, family, etc. There is no magic wand or perfect answer, which is why it is important to seek out qualified advice from an expert when making investment decisions.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.