To Roll or Not to Roll: 401(k) Rollover Considerations

The decision whether to roll your 401(k), or more generally your retirement plan balance to an IRA account when you retire or leave an employer requires thoughtful discussion and analysis. Don’t settle for a “stock answer” to roll over the balance you may receive after just a few minutes.

To determine whether it is better to keep your 401(k) or roll it into an IRA, there are technical rules and planning considerations specific to your situation you should review with a professional (e.g., CFP® practitioner). The rules for retirement plans and IRA accounts differ in some important ways that could be relevant to your situation. And, not all retirement plans have the same features. That said, paramount are planning considerations: making sure your decision is consistent with your overall investment strategy and planning.

Why you may want to keep your 401(k) plan upon retirement or termination of employment, at least for a while:

  • If you are retired, between age 55 and 59-1/2, and may need to take a distribution, a distribution from a 401(k) generally is more favorable than an IRA as there is no early withdrawal penalty after age 55. On the other hand, a penalty may be avoided with an IRA distribution before age 59-1/2, but it comes with restrictions. Beyond age 59-1/2 distributions from both IRAs and 401(k) plans can come out penalty free. There would be income taxes in both situations if the accounts are not a Roth IRA or 401k.
  • If you are 70-1/2 or older and still working, the money in your employer’s retirement plan may not be subject to required distributions until you retire. Even better, you may be able to roll other (previous employer) 401(k) money into your current employer’s plan to defer required minimum distributions on those monies as well, provided your current plan allows incoming rollovers.
  • If you are likely to need a loan, the 401(k) may be better. When you roll your 401(k) to an IRA, you give up the ability to take out a loan backed by your 401(k), which many but not all 401(k) plans allow. IRA accounts permit 60-day rollovers, similar to a 60-day interest-free loan, but there are requirements and the penalties for failing to meet the requirements may be harsh. The loan amount from a 401(k) plan is limited to 50% of the vested balance up to $50,000. We typically recommend against taking a loan from a retirement plan.
  • If you have access to a stable value fund in your 401k, you may want to take advantage of this lower-risk, relatively good yielding investment option allowed only in 401k plans. We often recommend the stable value fund as a way to implement asset location as part of a client’s fixed income allocation.

The above situations (some of which are very specific and less common) are reasons to consider keeping your 401(k) investments. In addition, in some states, a 401(k) plan may offer better bankruptcy protection.

Why you may consider rolling your retirement plan into an IRA account:

  • If your retirement plan investment options are too limited, you may do better investing in a diversified IRA account, with access to “best of breed” investments. While an IRA typically has access to nearly all of the investment options you can invest in, retirement accounts often can only invest in a small list of funds chosen by the Plan Sponsor and often are limited to one fund family.
  • An IRA account professionally managed may provide better re-balancing and investment discipline. We often see people whose retirement plan investment choices were made long ago and have not been managed or updated. In these cases, the risk level of the portfolio may “drift” as some of the investments (usually the more risky ones) do better than others, and begin comprising a larger portion of your portfolio.
  • If your 401(k) or retirement plan fees are high, you may be able to do better using an IRA account.
  • If your 401(k) does not allow a Roth option, you may benefit from using an IRA account and utilizing a Roth IRA strategy.
  • If you have significant gains in (low basis) company stock, rolling the plan over to an IRA may allow you to take advantage of a technique called “Net Unrealized Appreciation” (NUA). In this case, you can roll company stock into a taxable brokerage account and pay some income taxes, while the rest of the balance goes into an IRA. Depending on your situation, this technique may have significant tax benefits (being able to apply favorable capital gains rates to the gains on the company stock, after paying income taxes on the basis).
  • If you have a retirement plan from an ex-employer with a small balance, that money may be a candidate for consolidation, for easier management, efficiencies, and reporting.
  • Some retirement plans are more restrictive than IRA accounts in permitting certain beneficiary designations; for example, may not allow Trusts to be beneficiaries.

Most important is to make sure someone is “minding the store,” by managing your investments consistent with your goals, time horizon, and risk tolerance.

As you have read above, there are strategies and options to consider depending on the plan type, your age and personal circumstances. If you need assistance evaluating your options, contact us for a personal review of your specific situation: Mike Seidel at 908-821-9761 or Alex Vaccarella at 908-821-9795.

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Important Disclosures: Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by American Economic Planning Group, Inc. (“AEPG”) will be profitable. Definitions of any indices listed herein are available upon request. Please remember to contact AEPG if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. This article is not a substitute for personalized advice from AEPG and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investment decisions should always be made based on the investors specific financial needs, objectives, goals, time horizon, and risk tolerance. Please remember to contact AEPG Wealth Strategies if there are any changes in your personal or financial circumstances or investment objectives as these changes may impact our previous recommendations. This information is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of AEPG. Descriptions of AEPG’s process and strategies are based on general practice and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

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