Why Should I Rollover My 401k To An Ira

Pick An Ira Provider For Your 401 Rollover

Have an Old 401k? Should You Rollover to an IRA?

When moving your money, you need to figure out which brokerage will provide you with the services, investment offerings and fees you need. If youre a hands-on investor who wants to buy assets beyond stocks, bonds, ETFs or mutual funds, you need to look for a custodian that will allow you to open a self-directed IRA. On the other hand, if youre more hands-off, it might make sense to choose a robo-advisor or a brokerage that offers target date funds.

Disadvantages Of An Ira Rollover

A rollover is not for everyone. A few cons to rolling over your accounts include:

. You may have credit and bankruptcy protections by leaving funds in a 401k as protection from creditors vary by state under IRA rules.
Loan options are not available. The funds may be less accessible. You may be able to get a loan from an employer-sponsored 401k account, but never from an IRA.
Minimum distribution requirements. You can generally withdraw funds without a 10% early withdrawal penalty from a 401k if you leave your employer at age 55 or older. With an IRA you generally have to wait until you are age 59 1/2 to withdraw funds in order to avoid a 10% early withdrawal penalty. The Internal Revenue Service offers more information on tax scenarios as well as a rollover chart.

More fees. You may be responsible for higher account fees as compared to a 401k which has access to lower-cost institutional investment funds because of group buying power.
Tax rules on withdrawals. You may be eligible for favorable tax treatment on withdrawals if your 401K is invested in company stock.

Neither State Farm nor its agents provide tax or legal advice.

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When Not To Transfer To An Ira

You now know some of the benefits of moving your 401 to an IRA. But control over your money isnt the only thing that matters, and you may have other priorities. Its impossible to list every potential pitfall, but here are just a few examples of when I suggest that clients might want to leave funds with their employer.

Between age 55 and 59.5

When youre at least 55 years oldbut not yet 59 1/2 years oldyou might want to leave at least some of your money in the 401 plan. 401s allow you to pull money out without penalty after age 55 . IRAs, on the other hand, require that you wait until age 59 ½ to avoid an early-withdrawal penalty of 10% on certain distributions. There are always exceptions and workarounds, but those are the basic rules. If you intend to spend your 401 savings between the ages of 55 and 59 1/2, keep this in mind before making a transfer.

Some Government Workers

If you worked for a federal, state, or local government, be sure to explore your options. Those with 457 plans can potentially avoid the early-withdrawal penalty thats commonly associated with 401 and similar plans. Plus, some public safety workers can avoid early withdrawal penalties from a retirement planincluding the TSPas early as age 50.

Roth Conversions

RMD While Working

Stable Value Offerings

Fees and Expenses

NUA Opportunities

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When To Roll Over Your 401 To An Ira

Rolling over your 401 to an IRA is possible only if youre leaving your current employer or your employer is discontinuing your 401 plan. It is an alternative to:

Leave your money invested in your existing 401

Rollover to your new employers 401
Withdrawal from your 401, which would trigger a 10% penalty if you arent 59 1/2 or older

A rollover or IRA) does not have tax consequences. This would not be the case if you do a rollover to a Roth IRA.

Rolling over a 401 to an IRA provides you with the opportunity to choose which brokerage you want to hold your retirement funds. It may be the right choice if:

Your new employer doesnt offer a 401 plan
You cannot keep your money invested in your current workplace plan because your plan is being discontinued or your 401 administration wont allow you to stay invested for some other reason

Your new employers 401 plan charges high fees, offers limited investments, or has other drawbacks
Youd prefer a wider choice of investment options

However, there are some downsides to consider:

While 401 loans allow you to borrow against your retirement funds, no such option exists with an IRA.
Transferring company stock can be complicated account, read up on an NUA strategy that could save you a lot of money.)

If these downsides arent deal breakers for you, the next step is figuring out how to roll over your 401 to an IRA.

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Should I Roll Over My 401

Theres a lot to consider when deciding whether to roll over your 401 after a job change. The available options of keeping your account with your former employer or rolling it over into a new tax-deferred plan pose a number of pros and cons, all of which factor into the decision that you will ultimately make. A financial advisor can help guide you through this decision and others like it. Lets break down the reasons for rolling over and not rolling over your 401.

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What To Consider When Choosing A Broker

If youre planning to roll over your 401 into an IRA, youll likely be most concerned with a broker that can do the following things best. Most brokers do offer an IRA, but some popular ones do not, but the brokers above all offer IRAs. We also considered the following factors when selecting the top places for your 401 rollover.

Price: Trading commissions for stocks and ETFs have fallen to $0 at most online brokers, and thats great for investors. But there are other costs, too, perhaps most notably account fees, such as fees for transferring out of your account.
No-transaction-fee mutual funds: The brokers in the list above offer thousands of mutual funds without a transaction fee. If youre rolling over your 401 and you like the mutual funds you have already, these brokers may allow you to buy and sell the same one without a fee.

Investing strategy: While a 401 may limit your investing options to a pre-selected group of mutual funds, an IRA gives you the ability to invest in almost anything trading in the market. So we considered how each broker might fit an investors needs.

Why You Should Move Your 401 Into An Ira

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The 401 is a blessing for many people, as it allows them to build wealth over time using dollar-cost averaging. Still, sometimes it makes more sense to channel some of that money from the employer-based account into your own individual retirement account. The ever-astute Rick Kahler, the founder of Kahler Financial Group, in Rapid City, S.D., tells us why:

Larry Light: Why and when should you move your 401 into an IRA?

Rick Kahler: If your employer offers a 401 or other retirement plan, contributing to that plan is a foundation of your retirement savings. However, as you approach retirement age, you might consider moving some of your retirement funds out of your employer’s plan and into an IRA at a custodian like TD Ameritrade or Fidelity.

Such a rollover is often done when you leave an employer, though many employers give you the option of keeping your retirement account with them. What isnt popularly understood is that you also can do a rollover while you’re still employed, as long as you are over 59½.

Light: Why do this?

Kahler: One reason to consider leaving your employers plan is that most of them have higher overall fees than an IRA, especially if you choose from low-cost index mutual funds or exchange traded funds from a company like Vanguard or Dimensional Fund Advisors. Its not uncommon to save up to 1% annually by making a rollover into these mutual funds.

Light: What about withdrawing the money to live on? Is there a difference?

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Option : Leave Your Money Where It Is

Usually, if your 401 has more than $5,000 in it, most employers will allow you to leave your money where it is. If youve been happy with your investment options and the plan has low fees, this might be a tempting offer. Before you decide, compare your old plan with any retirement plans offered at your new job or with an IRA of your own.

Your new employer-sponsored plan might have more limitations on it than your previous plan or other available options. Maybe there are fewer investment choices/options. Maybe it doesnt have an employer match or higher management fees. So youll want to look closely.

Also consider how often you tend to stay at jobs. If you change jobs every few years, you could end up with a trail of 401 plans at all the different places youve worked. Consolidating might be easier in the long run.

Rollovers: The Tax Implications

401k to IRA Rollover Pros and Cons

The tax consequences of 401 rollovers depend on the option you pick

Employees who participate in their company 401 plans have a few options available when they leave the company. The tax consequences depend on which option they choose. The rules that govern this type of transaction can be complex and, in some cases, restrictive. It is important to understand these rules to avoid costly tax errors that can substantially disrupt your retirement plan.

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If You Have Company Stock

Some retirement savers hold company stock in their 401 alongside other investments. In that situation, if you roll over all those assets to an IRA, you lose the potential to get a more favorable tax treatment on any growth those shares had while in your 401.

It gets a bit confusing, but the idea is that if the company stock has unrealized gains, you transfer it to a brokerage account instead of rolling it over to the IRA along with your other 401 assets. Upon transferring, you are taxed on the cost basis .

However, when you then sell the shares from your brokerage account whether immediately or down the road any growth the stock experienced inside the 401 would be taxed at long-term capital gains rates . This could be less than the ordinary-income tax treatment you’d face if the stock went into a rollover IRA and then were withdrawn.

Here’s an example: If the cost basis of your company stock is $10,000 and the gains on it were $20,000, you would pay ordinary taxes on the $10,000 when you transfer the shares to a brokerage account.

The $20,000 in gains, however, would be taxed at long-term rates once the stock is sold. Any further growth from the point of transfer to sale would be taxed as either short- or long-term gains, depending on how long you held it before selling.

“It’s a complex transaction, and if done incorrectly, the strategy loses its tax advantage,” said CFP Melissa Brennan, a financial planner with ARS Private Wealth in Houston.

Benefits From An Ira Rollover

There are some situations where you are allowed to withdraw funds from an IRA before age 59Â½ without penalty â although youâll still trigger normal income tax. In this case, a rollover from a qualified plan can be beneficial.

Education expensesA parent or grandparent may take an IRA withdrawal for qualifying educational expenses, such as for a child or grandchildâs college education.

âFirst-time homebuyerâ in the familyYou may withdraw up to $10,000 from an IRA to supplement a home down payment for yourself â or a child, grandchild or spouse who wants to purchase a home and has not owned one for at least two years.

Health insurance premiums during unemploymentIf you are unemployed for at least 12 weeks, you may use IRA funds to pay for medical insurance. This can be an effective means of preserving your emergency fund while you seek new employment.

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Pro #: You May Gain Flexibility

Your new employers plan may have different investment options, loan options, protections against potential creditors, or other benefits that better suit your needs than your former employers plan. If you continue working until and beyond 72 years of age, you may be excused from required minimum distributions if your new employers plan allows it.

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Should I Roll Over My IRA Account into a ROTH IRA?

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What Are Your Choices For A Rollover

In general, once you leave a job you have three choices for how to deal with your employer-sponsored retirement plan:

Leave it with your old employers 401 plan: This approach requires the least amount of work, but may require you to have a minimum amount if you plan to maintain the account there.

Roll it over into your new employers 401 plan: This approach will require you to file some paperwork, but youll have all your 401 money in one place. This choice can make sense if you like your new employers plan.
Roll it over into an IRA: This move will require you to file some paperwork, but then youll have the complete freedom to invest the money as you see fit. If you liked the investment options you held in a previous plan, you may still be able to access those via an IRA.

, thats another option for a rollover. But this option is not typical for most individuals.)

If you roll over your 401 into an IRA, youll also want to consider the kind of rollover you need.

With a Roth 401, youll likely be more interested in a Roth IRA, so that you can maintain the substantial advantages of that plan.
If you have a traditional 401, then youll probably opt for a traditional IRA.

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Traditional And Roth Solo 401ks: Big Inheritances With Small Taxes

Whether you select a Traditional andRoth Solo 401k or a combination of both, a Solo 401k gives self-employed business owners a tax and retirement boost. There are no other retirement accounts that provide higher contribution limits or more flexibility in how you can manage these accounts. The flexibility encompasses choices beginning the day you open your account, to deciding what alternative investments you want to make, how you want to manage your tax advantages, all the way to how you want to pass the tax savings on as an inheritance.

With Nabers Group, your Traditional Solo 401k automatically comes with a Roth Solo 401k as a subaccount for even more flexibility beginning on day 1 or any day in the future.

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Why You Might Not Want To Combine Your Ira With Your 401

On the flip side, there are plenty of areas where a traditional IRA has a leg up on a 401 that is, of course, why so many people roll a 401 into an IRA. Here are the biggest you should know:

Wider investment selection: Within an IRA, you can invest in nearly anything under the sun not just the mutual funds, index funds and exchange-traded funds that show up in 401 plans, but also individual stocks and even options . You can also shop around for the absolutely lowest-cost funds, which can save you money. As noted above, you should look closely at your 401 plan and its investments to see if youd save money by leaving your funds in your IRA.
More loopholes for early withdrawals: Aside from the aforementioned loans, a 401 may allow hardship withdrawals in certain situations the IRS defines hardship as an immediate and heavy need, which means things like unreimbursed medical expenses, funeral expenses or disability. Those will waive the 10% penalty on early distributions youll still owe income taxes on the withdrawal. But a traditional IRA casts a wider net, allowing early distributions without penalty but with taxes still owed for higher education expenses and a first-time home purchase .

Low-cost options for investment management: If your 401 plan doesnt come with anything in the way of investment advice, and you want that sort of thing, youll have more options for getting it on the cheap within an IRA if youre open to a robo-advisor. .)

Where Should You Transfer Your 401

Watch This Before You Roll Over Your Traditional 401k to a Roth IRA!

You have several options on what to do with your 401 savings after retirement or when you change jobs. For example, you can:

Transfer funds to an IRA to maximize control.

Leave the money with your former employer, at least temporarily .

Cash out by transferring to a bank account, for example .

Transfer assets to your new jobs 401 plan, if allowed.

The right choice depends on your needs, and thats a choice everybody needs to make after evaluating all of the options.

Want help finding the right place for your retirement savings? Thats exactly what I do. As a fee-only fiduciary advisor, I can provide advice whether you prefer to pay a flat fee or youd like me to handle investment management for you, and I dont earn any commissions. To help with that decision, learn more about me or take a look at the Pricing page to see if it makes sense to talk. Theres no obligation to chat.

Important:The different rules that apply to 401 and IRA accounts are confusing. Discuss any transfers with a professional advisor before you make any decisions. This article is not tax advice, and you need to verify details with a CPA and your employers plan administrator. Likewise, only an attorney authorized to work in your state can provide guidance on legal matters. Approach Financial, Inc. does not provide tax or legal services. This information might not be applicable to your situation, it may be out of date, and it may contain errors and omissions.

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