By Matt Litzler, Family Wealth Planner
When deciding whether to rollover your 401(k) to an IRA, you should weigh the pros and cons to determine the option that protects your assets. A Rollover IRA is an account that allows you to move funds from your prior employer-sponsored retirement plan into an IRA. Carefully consider all your available options, which may include but not be limited to keeping your assets in your former employer's plan; rolling over assets to a new employer's plan; or taking a cash distribution (taxes and possible withdrawal penalties may apply).
Pros of rolling a 401(k) to an IRA
Here are some reasons why you should rollover your 401(k) to an IRA:
· More investment options in an IRA, including individual equities, bonds, ETFs, and mutual funds.
· Can allow for consolidation of assets into one location.
· You can choose whether to withhold for federal taxes on withdrawals from IRAs, while the IRS requires 401(k) plan administrators to withhold 20% of the total distribution for federal taxes.
· If you are pre 59 ½, you can withdraw funds penalty free for certain expenses such as medical expenses, college fees, and first-time home purchases in IRAs. This is separate from penalty-free withdrawals per Rule 72(t), which is applicable to both IRA and 401(k) accounts.
· For those charitably inclined, you can direct up to $100,000 per year to qualified charities from IRAs after age 70 income tax free. This can’t be done in 401(k)s.
· 401(k) plan may restrict or limit withdrawals.
Cons of rolling a 401(k) to an IRA
Even with the benefits that come with rolling over your 401(k) to an IRA, there are certain limitations that you should expect with your new retirement account. Some of these limitations include:
· 401(k) plans allow for loans using the retirement savings as collateral. This privilege is lost when you transfer your funds to an IRA, which does not offer loans or margin.
· 401(k) accounts are better protected should someone win a lawsuit against you.
· You can take penalty-free withdrawals from 401(k) accounts if you retire beginning at age 55.
Views expressed are as of the date indicated and are not intended to serve as investment advice, tax advice, a recommendation, offer, or solicitation to buy or sell any securities; they are based on the information available at the time and are subject to change based on economic, capital market, and other conditions. Any investment decision should be based on an individual’s own goals, time horizon, and tolerance for risk.
Prior performance does not guarantee future results and there is the potential for the loss of your capital investment.
Information and data provided have been obtained from sources deemed reliable, but are not guaranteed.
