When you leave a job, you typically pack up and take everything with you. However, you don’t necessarily have to do that with your 401(k) assets. You have options: keep your 401(k) assets in your old 401(k) plan; if the plan permits, roll them into a new employer’s 401(k); take the assets in cash (though this triggers a taxable event, including a 10% penalty tax if you are younger than 59½ years old); or roll them into an IRA.
If you’re thinking about a 401(k)-to-IRA rollover, ask yourself these questions first:
1. How do the fees compare?
Fees can reduce your account earnings and growth potential, so it’s important to keep them as low as possible. Consider how much each of your options will charge to maintain your account. Some IRA providers charge no fees to open or maintain an account, while 401(k) plans typically charge participants administration fees. You should also compare the fees associated with available IRA investment options versus the 401(k) plan and the account services available to you.
2. What investment options are available?
You’ll want to have access to enough investment options so you can design a well-diversified portfolio that matches your risk tolerance. For example, if you’re a conservative investor but only have access to stock funds, that might be a problem. Although 401(k) plans are generally required to offer a diversified menu of investments, IRAs typically have a larger selection of investments than employer-sponsored 401(k) plans. This means you’ll have more investments to choose from, but also more to sort through. Are you prepared to go through potentially hundreds of options, or do you want to focus on a few investment styles?
3. Will you need to take withdrawals?
While IRAs allow you to take money out without limitations, you may or may not be able to take periodic withdrawals from a 401(k) plan after you terminate employment. You’ll need to check with your plan’s administrator or refer to your Summary Plan Description for information. Keep in mind that most withdrawals will be taxable and subject to tax withholding if you take the cash. However, some 401(k)s offer tax-free Roth 401(k) options, in which case you’ll pay taxes up front and be able to take tax-free withdrawals later if you meet certain requirements.
4. Do you think you’ll retire early or late?
Generally, you will need to wait until age 59½ to take withdrawals without penalty from both IRAs and 401(k) plans. However, there’s an exception for 401(k)s — if you leave your job the calendar year you turn 55 or later, you can take penalty-free, taxable withdrawals from your 401(k). It’s a complex set of overlapping rules. If you continue to work after age 70½ (age 72 if you were born on or after July 1, 1949), you don’t have to take required minimum distributions (RMDs) from a 401(k) until you terminate employment, provided you do not own more than 5% of the company. However, if you roll your 401(k) account to an IRA, you will be subject to the RMD rules regardless of whether you continue working after age 70½ (or 72).
5. Are you concerned about protecting your assets?
The Employee Retirement Income Security Act (ERISA) shields 401(k) assets from creditors including lawsuits against you. However, IRAs don’t have that kind of protection.
Do your research before making a move
Before taking steps to roll your 401(k) assets into an IRA, review your 401(k) plan’s Special Tax Notice Regarding Plan Payments, available from your plan administrator or employer, to make sure you understand what’s allowed and what isn’t.
Also, talk to a financial professional as well as your tax and legal advisors, as they can can help you review your options and decide which option is best for you.
This informational and educational content does not offer or constitute and should not be relied upon as financial, tax or legal advice. The subsidiaries of Equitable Holdings, Inc. do not provide tax or legal advice or services. While it may be appropriate under some circumstances to rollover your 401(k) into an IRA, the disadvantages of doing so may outweigh the benefits under certain circumstances. In considering a rollover, you should work with your financial professional and tax and legal advisors to fully compare your options to ensure that any rollover is appropriate, suitable and in your best interests.
Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company(Equitable Financial) (NY, NY), Equitable Financial Life Insurance Company of America (Equitable America), an AZ stock company with main administrative headquarters in Jersey City, NJ, and Equitable Distributors, LLC. Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI and TN).
GE-3421710(02/21)(exp.02/23)
