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Rolling 401(K) Money To An IRA

If you have money in a 401(k) or other retirement plan with a former employer, then you have a decision to make.

If you have money in a 401(k) or other retirement plan with a former employer, then you have a decision to make. Do you leave your money in the company plan, take some or all of the money, or roll the balance over to an IRA?

For the vast majority of clients I have worked with, rolling into an IRA is the best option. It gives you more investment flexibility, establishes individual IRA ownership, and allows for easier distributions. But before you decide to roll over, you'll need to evaluate a variety of factors some of which make it more advantageous to keep the money in the former employer's plan and some of which make it better to roll the money to an IRA. Previously, far too many Advisors failed to assess these considerations, leading the Department of Labor to pass regulations requiring that Advisors must act in the best interest of their clients when it comes to rollover recommendations.

Rollover considerations generally fall into 5 issues:

  1. Costs - 401(k)s may be cheaper than what you pay in an IRA. Know the difference and if the IRA cost is higher, make sure the benefits are worth it to you. A caution flag should especially go up if your Advisor recommends investing your rollover in annuities, or non- publicly traded investments and other high fee products.
  2. Creditors - 401(k)s are protected by federal law. IRAs are protected up to 1 million dollars, but are then subject to state laws.
  3. Loans - If you have a loan in your 401(k) that loan cannot be rolled over. You must pay it off or be taxed on the balance if you roll.
  4. Company Stock - If you have a highly appreciated stock position in your 401(k), you are allowed to distribute that and pay capital gains tax on the cost basis, not current value. This is not available in the IRA.
  5. Withdrawals Prior to Age 59 1/2 - Normally, withdrawals from an IRA prior to age 59 1/2 are subject to a 10% penalty. This may not apply between ages 55 and 59 1/2 if distributions occur from a 401(k).

Once again, for most clients rolling a 401(k) balance to an IRA is the right call however, it is important to know there are considerations and tradeoffs to this decision. We are always available to discuss what's right for you.

Dean S. Mailhes, CFA