Do you have a 401(k) from a previous employer sitting somewhere untouched and unmanaged? Or perhaps you’re in the process of switching jobs and wondering about the best way to rollover the funds to a new plan. One of your options is to rollover your 401(k) to an IRA, but you should carefully consider and weigh the advantages and disadvantages of each option before making your decision.
You have various options for your retirement assets when you change jobs or retire including leaving them in your existing 401(k), rolling them into your new employer’s 401(k) or cashing them out. Ultimately, the decision you make about your 401(k) depends on your needs and circumstances. With each option, take into consideration applicable fees and expenses, the services and features offered, as well as potential tax consequences both at the time you leave your employer and after.
A Closer Look: Direct Rollover into an IRA
Rolling your 401(k) directly into an IRA allows you to decide how to manage your assets, whether it be in an online account in which you choose your own investments, or you work with a professional like a financial planner who can help you choose investments.
Broader Investment Options
One of the primary reasons to choose rolling over a 401(k) to an IRA is the broader range of investment options. Employer-sponsored 401(k) plans typically have a limited selection of investment options, whereas IRAs invested in a brokerage account offer access to a vast array of investments, including individual stocks, bonds, mutual funds, ETFs and even alternative investments like real estate or commodities.
Working with your financial planner, you can create a personalized strategy that aligns with your unique financial goals, risk tolerance and timeline, ensuring investments are optimized for you.
Tax Implications
Taxes are a critical factor when considering a 401(k) rollover. If you’re moving your funds from a 401(k) to an IRA, the rollover is generally tax-free if transferred directly from the 401(k) to the IRA, but there are some easy-to-miss steps that could make this transfer taxable. Your financial planner can help you navigate these complex tax rules and develop strategies to minimize your tax liability.
Consolidation of Accounts
If you have several 401(k) or other retirement accounts from previous employers, it can be helpful to consolidate them into an IRA rollover for ease of tracking your assets and overall investment management.
Understand RMD Considerations
Once you reach age 73 (as of 2023), you must start taking Required Minimum Distributions (RMDs) from a traditional IRA or 401(k). However, if you’re still working at the company that sponsors your 401(k), you may be able to delay RMDs from that plan until you retire. Rolling your 401(k) into an IRA could eliminate this option, so if you plan to keep working past 73, it’s worth considering the impact on your RMDs. We’ll help you talk through these options.
Other Options for Your 401(k)
Rolling over your employer-sponsored 401(k) to an IRA is just one option. You may want to consider the pros and cons of other options.:
Here’s a quick benefit comparison of your four options:
No matter how you handle your 401(k), working with your financial planner can help you understand options and make an informed decision that aligns with your long-term financial goals.
If you have a 401(k) or other investment account that you’d like to consider rolling over, please contact us. We’d love to discuss the best option for you!
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