Should I Roll my 401(k) into an IRA?

Should I Roll my 401(k) into an IRA?

A question we frequently hear is, should I roll my 401(k) to an IRA?  The answer, as it turns out, is not the same for everyone. It depends.  Let’s explore some of the reasons why you should or shouldn’t rollover your 401(k) to an IRA.

When You Should Roll Your 401(k) into an IRA

Here are the most common reasons to consider rolling your 401(k) to an IRA.

• You prefer low cost investment options including ETFs, but your plan’s investments have relatively high costs. Moving to an IRA may give you the opportunity to lower your fees.
• You want more investment options (for instance more index funds, or access to socially responsible options) and your current plan only has limited preselected options. Depending on the provider, an IRA can give you a wider array of investment options that better suit your needs.
• You want flexibility in withdrawals and your plan doesn’t provide it.  All plans governed by ERISA require at least 20% withholding on withdrawals for federal income taxes and that may not fit your situation.  Also, some plans may limit the frequency of withdrawals and only allow a certain number of withdrawals per year.  Another limitation is that many plans do not allow you to choose which investments to sell in order to fund a withdrawal. You may want control of which investments are sold. Moving your money to an IRA will give you control over withdrawals.

When You Should Not Roll Your 401(k) into an IRA

Now before you sign that transfer paperwork, make sure you’ve reviewed the main reasons why it may not be a good idea to rollover your 401(k) to an IRA.

• You want to retire early. If you leave your job at age 55 or later, then you can take penalty-free withdrawals from your 401(k) (from that job) immediately. Of course, withdrawals are still subject to income tax, but not the 10% early withdrawal penalty.  If you were to roll over to an IRA, you are not permitted to take penalty free withdrawals until age 59 ½.
• Your 401(k) may already be in low cost investments. You need to research the fees and costs within your 401(k) before you can compare them to those in a particular IRA.
• You are concerned with asset protection.  Federal law protects the money in 401(k) plans from most lawsuits, but IRAs are protected by state law. This means you have to know the rules for your state. A quick phone call to your attorney should let you know if your IRA is shielded from creditors and up to what amount.
• You don’t want to lose access to loans from your 401(k). Some 401(k) plans have provisions to allow participants to borrow up to $50,000 from their account. However, rules vary by plan and there are many other factors to consider when determining if a 401(k) loan is in your best interest.

Are You Still Not Sure?

While we hope this blog is helpful, we acknowledge that your situation is unique.  Your decision about whether to roll over your 401(k) should be based on your individual circumstances in conjunction with the guidelines above. Additionally, the above list of reasons is not exhaustive. It merely covers the most common reasons.

At PFW, this is one of the many areas in which we help our clients.  We research the pros and cons of rolling over your 401(k) within the context of your unique situation and advise you on the best course of action. View the rest of our services here.

Would you like help making decisions about your 401(k)? If so, please contact your financial advisor or reach out to PFW at: info@planfirstwealth.com or 646.201.4865

Plan First Wealth is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.