401(k) Rollovers: When is it NOT a good idea?
Whether it is for greater investment flexibility, starting a new job, or retiring, rolling a 401(k) plan over into an IRA is usually a route that many individuals take. While in most scenarios, this is a prudent step to take, there are a couple of reason why one should consider leaving a 401(k) where it is.
Age 55 Distributions
Early retirees could benefit from this rule. Whereas IRAs allow you to take distributions after age 59 ½ without facing a 10% withdrawal penalty, 401(k) plans allow you start after age 55. The caveats to keep in mind are that this only applies to your current 401(k) and you must separate from service from the current employer. Old 401(k)s are not eligible for the early distribution.
Some 401(k) plans can offer investment options only available through the 401(k) (e.g. low-cost mutual funds or fixed return funds). If these investments are a good fit in your overall portfolio allocation, then you may want to consider leaving the 401(k) where it is.
ERISA (Employee Retirement Income Security Act) provides certain provisions to protect retirement savings plans. One such provision is the protection of your 401(k) from creditors in the event of personal bankruptcy. While IRAs can be protected by creditors as well, these protections vary from state to state.
Employer Stock in a 401(k)
Individuals who have a significant amount of their 401(k) savings in employer stock can consider taking advantage of the Net Unrealized Appreciation strategy as you could end up paying less in taxes. Rolling over a 401(k) into an IRA in this instance would make you ineligible from qualifying for this favorable tax treatment.
Ultimately, the decision to roll a 401(k) over to an IRA is highly dependent on an individual’s situation. It is highly recommended that you consult with a financial advisor to consider all of your options.
Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.