Financial Planning, Retirement

Things To Consider Before Rolling Over Your 401(k) Assets

1/25/17 8:00 AM

iStock-510462884.jpgWhen people with an employer-sponsored 401(k) plan leave a company, voluntarily or not, they will generally have to choose whether to leave their old 401(k) where it is, roll it over to their new employer’s plan, if available, or roll it over to an Individual Retirement Account (IRA). That last option appears to be quite popular because more than half of the U.S. households that owned a traditional IRA in 2016 indicated that their accounts contained rollovers from employer-sponsored retirement plans, according to new Investment Company Institute (ICI) data. Among those households, 82 percent indicated that they had rolled over the entire retirement account balance in their most recent rollover, and commonly cited reasons for rolling over included “not wanting to leave assets behind at the former employer,” “wanting to preserve the tax treatment of the savings,” and “consolidating assets.”


Ideally households will utilize multiple tax-advantaged saving vehicles but for those considering a complete switch, there are several IRA limitations to be aware of. For example, loans are generally not permitted from IRAs or from IRA-based plans, apart from the 60-day rollover “loophole.” 401(k)s, on the other hand, do allow for more flexible, penalty-free loans, although dipping into retirement savings early by any means should usually be avoided whenever possible. More importantly, 401(k)s can often be a better bargain than IRAs in the same way that group health insurance is cheaper than individual coverage, i.e. lower management fees and greater access to lower-fee share classes than individual investors might typically be able to come by on their own. 401(k)s can also offer stronger protections against personal lawsuits and in certain situations provide penalty-free access to a participant’s savings as early as age 55, an ability that is lost when the funds are rolled into an IRA. With so many potential issues to consider, consulting with a professional financial advisor is recommended when deciding what to do with one’s life savings.



Sources: Investment Company Institute, Forbes, U.S. IRS

Post author: Charles Couch