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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 (IRA). 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.


    Discussion

    Joseph Velson from CA posted about 1 year ago:

    Two additional points:
    1) your 401k may give you access to institutional funds with extremely low expenses that would not be available in an IRA
    2)some 401k plans allow a partial rollover which means that you can keep some of your funds in the plan to take advantage of lower expenses while rolling over the balance for more flexiblility in IRA options.


    John Petzinger from CA posted about 1 year ago:

    If the 401K contains company stock that has appreciated, it should be possible to transfer non-company-stock assets to an IRA, and company stock to a regular, non-IRA brokerage account. This distribution of the company shares is usually referred to as an "in-kind" distribution, because the shares are not sold but transferred directly into another account. You will have to pay taxes on the COST of the company stock, but not on its full current value. While it usually doesn't make sense to pay taxes any earlier than you have to, if the company stock has appreciated a lot over the years when you accumulated it, then it makes sense, because the difference between cost and current value will 1) not be taxed until you actually sell it, 2) be taxed at the lower capital gains tax rate, 3) may not be taxed at all if you have a net capital loss in the year when it is sold. The first step to finding out whether and in-kind distribution of company shares makes sense, is to find out the acquisition cost of the company shares. If the value minus cost of these shares is a significant fraction of your total 401K balance, say, over 15%, then it probably makes sense to opt for an in-kind distribution of company shares. Since you will be taxed on the cost of the company shares in the tax year when you ask for the transfer, it might make sense to keep everything in the company 401K until the year after you retire, when typically your income and tax rate will be lower.


    Neil Hoffmann from PA posted about 1 year ago:

    some 401K plans have higher fees and expenses than you can get with IRA accounts at Vanguard or others


    Bruce from Vermont posted about 1 year ago:

    Just to clarify, my understanding is that if I were to roll over my 401(k) into my existing traditional IRA there are no taxes assessed?


    Bruce from Vermont posted about 1 year ago:

    Just to clarify, my understanding is that if I were to roll over my 401(k) into my existing traditional IRA there are no taxes assessed?


    Charles Rotblut from IL posted about 1 year ago:

    Neil,

    Yes, the rollover is tax-free so long as either do a direct rollover or complete an indirect rollover within a 60-day period.

    -Charles


    James Kim from FL posted about 1 year ago:

    is it worth to convert IRA money to roth IRA at age 78?


    Mike Woods from TX posted about 1 year ago:

    In one of your recent newsletters, it mentioned convert a non-traditional IRA to a ROTh. Does this apply to anyone regardless of income? Are there any charges associated with this type of conversion?

    Mike


    James Kim from FL posted about 1 year ago:

    can ira to roth ira conversion can be done only in tax time or any time? Converted roth ira earning can be taxable or free of tax?


    Charles Rotblut from IL posted about 1 year ago:

    James,

    You can rollover, convert or contribute to an IRA at any time. The dates only matter as to what tax year the event applies too (e.g. if you convert a traditional IRA to a Roth IRA today, it will impact your 2014 taxes).

    The capital gains and income you realize in a Roth IRA are tax free. You will owe taxes on the dollar amount of the conversion from a traditional IRA (which was funded with pre-tax dollars) to a Roth IRA (which is funded with post-tax dollars).

    -Charles


    Charles Rotblut from IL posted about 1 year ago:

    Mike,

    We've previously discussed in the AAII Journal converting from a traditional IRA to a Roth IRA. There is not an income limit on these conversions, but you will owe taxes on the amount converted.

    -Charles


    Richard Christoph from CA posted 12 months ago:

    To corroborate and add to Mr. Velson's point:

    1. The expenses for funds in my Dignity Health 403B plan administered by Fidelity, are indeed lower than for the same funds in my Rollover IRA.

    2. The 403B plan also offers Valic's fixed interest option which, since I do not like bonds or bond funds, is a preferable alternative not available in the Rollover IRA.


    Mark from Delaware posted 2 months ago:

    If you elect to retain the 401K after retirement and reach required minimum distribution (rmd) age, you are obligated to take a distribution from the 401K. If you have a 401K and an IRA you must take rmd from each. If you have multiple IRA and multiple 401K you have to take rmd based on aggregate value of the IRAs from as few as any one IRA, but, each 401K individually.


    Mark from Delaware posted 2 months ago:

    401K accounts can have stable value funds. These are products that combine a bond portfolio, a cash component for liquidity, and are wrapped with insurance products that absorb market volatility.

    IRAs cannot hold stable value funds.


    Louis Jeffries from MA posted 2 months ago:

    Don't we want the market volatility in a bond portfolio?


    Sanford Levey from MA posted about 1 month ago:

    So,if you have both an IRA and a 401k an RMD is applicable to each one based on their respective year end values? This being the case the taxes due
    Would be no greater than if you had all in a 401k or all in an IRA?


    Charles Rotblut from IL posted about 1 month ago:

    Sanford,

    You must take RMDs from both. The total amount is the same regardless if your savings are split between the two or are all in one account.

    The
    IRS has helpful information on its website.


    John from IN posted about 1 month ago:

    does a rollover from a 401 trip MAGI levels?


    Charles Rotblut from IL posted about 1 month ago:

    John,

    If the 401(k) is rolled over to another 401(k) or a traditional IRA, than it does not affected your taxable income. The reason is that the assets are being moved from tax-deferred account to another.

    If you rollover a 401(k) to a Roth IRA or two a taxable account, then the balance becomes immediately taxable. The IRS says, "You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA."

    -Charles


    Leonard Conrad from IL posted about 1 month ago:

    Not discussed but an IRA can give you more flexibility in designating beneficiaries as no spousal consent is required as is often necessary with 401(k) or 403(b) plans.


    Donald Myers from AZ posted about 1 month ago:

    I have done and am still doing these: (1) conversions from IRA to a Roth IRA, (2) moving funds from 403b, 401a accounts with former employer. Whether it is good or bad depends on your personal situation, such as rules & limitations put in place by your former employer, laws in the state of your residence, what you want to do about your heirs. In my case I get some state tax exemption ($2500/year) for my RMD from my 403b/401a accounts. In some other states all such income might be state income tax exempt. RMD from an IRA would not qualify in either case. In some states IRA's are shielded from bankrupty and other legal claims (also more often true for RMD from 401k's, 401a's and 403b's) but not all states so check the laws. As noted above what ever you convert from a regular IRA to a Roth is immediately taxable so you want to time it right. Your heirs will likely have better provisions if they inherit a Roth than if they inherit a regular IRA (non-spousal heirs). It appears that one should start conversions before retirement but I didn't and still thought it was a good decision. There have been a few years you could take contributions to charity from an IRA and count it as part or all of the RMD but that law has expired several times or was re-instated only at the last moment.


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