To Roll or Not to Roll

Financial planners generally recommend that you roll over your 401(k) into an IRA when you leave a job – but there may be some important exceptions to consider before doing so. Like every aspect of financial planning, a rollover isn’t a one-size-fits-all solution.

If you need a refresh, a rollover occurs when you take funds from your traditional IRA and invest them in a Roth IRA instead. The regulations and tax implications vary between a 401(k) and Roth IRA. For example, you pay taxes on contributions to a Roth IRA in the year of the contribution. In contrast, 401(k)s are typically taxed upon withdrawal.

Today, we’ve rounded up the top pros and cons of a rollover to help you make the best decision for your specific circumstance – let’s dive in.

Reasons to Roll Over

A rollover has several benefits, including:

  • It is more difficult to keep track of multiple retirement accounts that are spread among different employer plans.
  • An IRA at firms such as Vanguard and Fidelity usually offer many more investment options.
  • You can borrow from an IRA penalty free to pay certain educational expenses and some medical expenses in excess of 7.5% of adjusted gross income.
  • You may not be able to withdraw assets from a 401(k) plan in retirement as often as you can with an IRA.

Reasons to Keep a 401(k) With a Former Employer

While a rollover might seem like the obvious choice, there are also some drawbacks to this retirement account type.

  • If you leave your job after turning 55, you can tap into your 401(k), but it’s harder to withdraw from your IRA without penalty before age 59 1/2.
  • If you plan to work after age 70 1/2 your minimum required distributions (RMDs) can be postponed from a 401(k) but not from an IRA.
  • Large, well-managed 401(k) plans may offer lower investment expenses than an IRA.
  • You may face tax consequences when rolling over your 401(k) if your plan contains large amounts of company stock.

Another important issue to remember is that as of 2018, you can no longer “undo” a rollover – if you transfer money from your traditional IRA to a Roth account, you need to be committed to the change. As always, we recommend talking to your financial and or tax advisor if making the decision leaves you flummoxed.

Learn More with Clarity

We’re here to help you tackle retirement planning. Click here to connect with a member of the Clarity team today to get started.

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