401k Rollover Into an IRA

Reasons to roll your 401k into an IRA

Let’s start off by saying that everyone’s situation is different. There are multiple factors to consider before rolling over your 401k, 403b, 457, or any qualified plan asset into an IRA. Our purpose here is to provide insight into common scenarios surrounding a 401k-IRA rollover. If you have a unique situation that you’d like to discuss, please reach out to our office.  

Tax-Deferred Plans

For the most part, people have the majority of their retirement assets in tax-deferred plans. Tax-deferred is another way of saying: you didn’t pay tax, received the deduction for the contribution, and will have to pay tax when the money is withdrawn.  Many people also have access to a ROTH option inside their 401k or qualified plan

ROTH option within a 401k

Keeping it simple, in this scenario, you don’t get a deduction for contributing. If you were able to get a match from your employer, they don’t typically match a ROTH deferral but instead match you in tax-deferred dollars. Additionally, you don’t have to pay tax upon withdrawal in retirement in the future.  There are some rules to this tax-free distribution, but in general, you must have a ROTH IRA opened for at least 5 years to take advantage of this. You can also access your ROTH IRA at age 59.5 if it has not been in there for 5 years but you cannot touch the growth (principal only).

Now, to get into the “weeds” of why you should consider an IRA rollover…

If you are still employed with the employer who offered you the 401k plan or qualified plan, most likely you are not able to roll the money out yet. Some plans do allow for in-service (while you are employed) transfers to an IRA if you are 59.5.

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Furthermore, many employer plans simply lack investment options, risk-appropriate investments, and guidance (we call it advice) within the 401k plan.

Let’s face it, the details of these investments are like a foreign language to most people. It can get very confusing looking at the different mutual funds, ETF’s, and other options within the qualified plan.  Many people are very disciplined in setting aside money each paycheck to save, but have no clue on how to invest the money once inside the 401k.

If you have left a 401k or qualified plan behind, your previous employer is most likely barring a cost to hold/administer your 401k.  No one has a crystal ball, but we do know that markets will go and down. So, who is managing your 401k now that you have left the company? Are the best decisions for you being made at this point? 

What should I do if I have a qualified plan with a previous employer?

This is where you should consult a financial planner. Everyone’s risk objectives and time horizons are different.  Being able to sit down with a financial planner to explore your options that best-fit you may be more appropriate than leaving the funds in your 401k or qualified plan.

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What about if I’m still employed?

We can now help you manage your 401k even while you are employed. This is not available to everyone, but there are many 401k plans that allow us to use our approved strategies that could be more customized to your needs/risk objectives. Give us a call to find out if your employer plan has that capability.