See what you need to know when you leave your job and you’re thinking of moving money to an IRA.

You may have the opportunity to roll funds from your 401(k) plan to an IRA that you control. There are several advantages to doing so (like potentially lower fees, more investment choices, and better control over distributions and beneficiaries).

But there may also be disadvantages to making the move. For example, if you leave your job after age 55 or you plan to do Roth conversions, it could make sense to leave your money in your former employer’s 401(k)—at least temporarily.

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We cover some of the pros and cons of a 401k to IRA rollover here. While there may be other aspects to consider, you’ll learn about some of the biggies, and you’ll be off to a decent start.

Remember that you don’t need to roll the money over immediately. If it makes sense to wait and do it later, that’s often an option. Just verify with your former employer to see what’s available to you.

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Timestamps:
00:00 Does it Make Sense to Roll Now or Later?
00:36 More Control Over Costs and Investments
02:21 More Tax Withholding Options
02:51 Easier Withdrawals and Money Transfers
04:33 Other Advantages: Beneficiary Setup, Frozen Plans, Flexibility
06:16 RMD Advantages (Required Minimum Distributions)
07:46 Disadvantages of Rolling Over: Age 55
08:42 Other Disadvantages: Lower Costs? Creditor Protection
09:54: Roth Conversion Pro-Rata Rule: Disadvantage of Rolling Over
11:00 How to Roll From Your 401(k) to an IRA
12:24 Avoid Potential Problems With Rollovers (Logistics of Payee)

Be sure to research issues on creditor protection. This might be a good start in your journey as it relates to IRAs: Another topic that we don’t dig into here is Net Unrealized Appreciation (NUA). If you work for a company that offers or provides stock, that may be a complicating factor deserving more attention, but most people I speak with don’t have that issue.

Justin Pritchard, CFP® is a fee-only fiduciary advisor who can work with clients in Colorado and most other states.

IMPORTANT:
It’s impossible to cover every detail and topic in a video like this. The only thing that’s certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration….(read more)

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401k to IRA: Pros and Cons, How to Do It

As people move from one job to another or transition into retirement, they often face the decision of what to do with their 401k. One option is to roll over the funds into an Individual retirement account (IRA). There are several pros and cons to consider when making this decision.

Pros of rolling over a 401k to an IRA:

1. More investment options: 401k plans often have a limited selection of investment options, whereas IRAs can offer a wider range of choices including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
2. Consolidation: Rolling over a 401k into an IRA can make it easier to manage retirement savings, especially if an individual has multiple 401k accounts from different employers.
3. Lower fees: Some 401k plans have high administrative fees, which can eat into investment returns. IRAs may offer lower fees, depending on the investment options chosen.

Cons of rolling over a 401k to an IRA:

1. Loss of employer match: Some 401k plans offer employer matching contributions, which can be a significant financial benefit. Moving funds out of a 401k means giving up this match.
2. Early withdrawal penalties: While both 401k plans and IRAs have penalties for withdrawing funds before age 59 ½, the penalties may be different, and individuals should also consider the impact of these differences.
3. Potential loss of creditor protection: 401k plans have federal creditor protection, whereas the protection for IRAs varies by state. This is an important consideration for individuals in professions with potential financial liability, such as doctors or lawyers.

How to roll over a 401k to an IRA:

1. Choose an IRA provider: Research and compare different IRA providers to find one with low fees and a good selection of investment options.
2. Open an IRA account: Once an individual has chosen a provider, they can open an IRA account and fund it with the rollover funds from the 401k.
3. Complete the rollover process: This typically involves contacting the 401k plan administrator and requesting a direct rollover to the IRA provider.

In conclusion, rolling over a 401k to an IRA can offer more investment options and easier management of retirement savings. However, individuals should carefully weigh the pros and cons before making this decision to ensure it aligns with their long-term financial goals and retirement plans. Consulting a financial advisor or tax professional can also provide valuable insight and guidance in the rollover process.