Should you roll your 401(k) into an IRA?


If you’ve changed jobs and have a 401(k) plan with your former employer, you have some decisions to make.

First, know your options:

  1. Roll the 401(k) over into an Individual Retirement Account (IRA)
  2. Transfer it to your new employer's 401(k) plan.
  3. Leave it where it is.
  4. Take a lump sum distribution and cash out. (Warning: watch out for tax consequences)

Second, you’ll need to ask yourself a few questions before you decide.


Do you want investment choices?


Most 401(k) plans don’t allow you the flexibility to manage your investments without constraints. Some plans may make the decision for you, while others restrict you to a limited list of investments from which you may choose.

Rolling over to an IRA account allows you to choose from a potentially unlimited universe including stocks, bonds and mutual funds. This may add additional options to help your investment goals that may not have been available in your company plan.

Does your 401(k) include stocks?


If your 401(k) includes low-cost, high-value company stocks or mutual funds that you otherwise wouldn’t be able to purchase, it might be worth keeping. The key here is if this stock is not available outside of the plan.

On the other hand, if your company plan limits the time or option to diversify the company stock, an IRA may benefit diversification without limitations.


Are you paying high 401(k) fees?

IRAs may involve fewer administrative and overhead costs than 401(k)s, so it is quite possible to pay less for an IRA and gain more options. There are even some No-Fee IRAs if you want to manage yourself as you were your retirement plan investments.

If you’re looking to hire an advisor, use caution when evaluating IRA fees. Like any purchase you make, know what you’re paying for and what the service provided will be. Watch for high commissioned products that could be costly up front.


Will you need the money before age 59½?

It’s best not to withdraw retirement funds before age 59½, but if you must, try to only take distributions for tax ‘qualified’ reasons that may avoid the 10% additional tax penalty.

Often by leaving in your company retirement plan you may not have as many distribution options or flexibility. It is common that plans will limit distributions to all or nothing.

IRAs can allow more flexibility to multiple partial distributions of funds to use only as needed, and not require full distributions. This can aide in limiting any negative tax consequences of distributions.

IRAs are also flexible to schedule a series of distributions beginning at age 55 and may avoid the early 10% penalty. These are commonly called 72(t) payments. You’d want to work with your tax advisor if you’re exploring this option to make sure all rules are followed.


What are the tax consequences of making changes?

Before any form is completed or change is made, it is important that you fully understand the potential tax consequences. There are many tax professionals available to assist or even via in Publication 590.

Properly moving funds directly from a company retirement plan to an IRA in a qualified transaction will continue to extend the tax-deferral of those assets and not trigger any current taxes. Just remember, a mistake could trigger taxes and in some cases be quite costly or unable to undo. So, be certain of the options selected before they are finalized to help avoid any problems.


Find out more about 401(k) plans at Horizon