Considerations When Rolling Over a 401(k) to an IRA
A key decision a person must make when leaving a job is what to do with workplace retirement savings.
Among the options are rolling over the assets to an individual retirement account (. Financial industry regulator FINRA says there are 10 things workers should consider when deciding if a IRA rollover is the best option.
- Which Transfer Option Is Best—A departing worker can typically choose among leaving his savings in his employer’s plan, transferring the savings to his new employer’s plan, rolling the savings over into an IRA, or cashing out the balance. The last option triggers taxes, including a steep penalty for those under the age of 59½.
- Roth or a Traditional IRA—No taxes are incurred if a Roth 401(k) is rolled over into a Roth IRA, but if a traditional 401(k) is rolled over to a Roth IRA, taxes will be triggered.
- Indirect Rollover Downsides—An indirect rollover gives you a lump-sum payout, less a temporary 20% withholding. If the lump sum is not reinvested into a new retirement account within 60 days, the payout is treated as a distribution and is taxable.
- Free and No-Fee Claims—Ads can mislead investors into thinking the IRA account will be free of charges and fees. While it may be free to roll over your savings, annual charges and other account expenses may still be levied.
- Conflicts of Interest—The person or party suggesting an IRA rollover may benefit financially from the new account being opened. Always ask an adviser or company representative how they will benefit from your IRA rollover.
- Investment Options and Services—Not all firms provide the same level of service or selection of investment options. Determine what you need before deciding on where, or if, to rollover your retirement savings.
- Fees and Expenses—Pay close attention to fees, sales loads, commissions, advisory fees, and account or custodial fees. All of these fees lower your realized return and vary by firm.
- Raise Important Issues With Your Adviser—Ask about potential tax implications, fees, expenses and services provided. Say no if you don’t understand what you are being pitched.
- Your Age and Taxes—You may be able to take penalty-free withdrawals from an employer-sponsored plan between the age of 55 and 59½, whereas you will have to wait until age 59½ to avoid penalties on an IRA withdrawal.
- Taxes on Company Stock—Special tax rules may apply if your plan holds company stock. Consult a tax professional for guidance.
Source: “The IRA Rollover: 10 Tips to Making a Sound Decision,” FINRA.