Should I Rollover My 401(k) to an IRA? Pros and Cons

The average American worker has 12 jobs in a lifetime1 –what do you do with your 401k when you move onto another job? With your investments, you should consider whether you are thinking of [EB1] keeping a 401k or doing a rollover to an IRA. We break down the difference between a 401(k) and an IRA. What you do with accounts from previous workplaces is important as you build your retirement plan. 

Benefits of Rolling Over Your 401(k) to an IRA[EB2] 

There are a few key benefits of rolling over your 401k to an IRA:

Control Over Investment Choices

Typically, IRAs have a large number of investment options so you may have a lot of choices when building your investment strategy. When investing, having a plan administrator may help with managing your investment and making sure you’re following all regulations. Typically, the employer is the plan administrator, but in the case of an IRA you can become the plan administrator or appoint someone else. [EB3] 

Flexible Beneficiary Options

The purpose of an IRA or a 401k is to plan for retirement, but life can be different than what is planned sometimes. Having a plan for your beneficiaries with your IRA will help make sure that your planning and savings go to someone you trust to receive them. With a traditional IRA or a Roth IRA, you may have more options to who you can list as your beneficiary. 

Access to No-Penalty Withdrawals

These investments are to plan for your retirement, but they can also help with unexpected situations you may run into in the future. To avoid an early withdrawal penalty, you normally would have to withdraw before your planned retirement (age 59 1/2). There may be penalty-free options if withdrawing sooner, but only for things such as paying a medical insurance premium after a job loss and now with the SECURE Act additional penalty free options may be available depending on your situation (taxes would still apply). If you plan on using your investment for education expenses, here are 5 things to know about using your IRA for education expenses

Disadvantages of Rolling Over 401(k) to an IRA

If you’re thinking about rolling over your 401k to an IRA, make sure to also research the disadvantages of this option. A few disadvantages may include having to cover investment fees yourself instead of your employer. Your employer may have greater buying power when it comes to investing and can cover the fees and get a better investment. A few other disadvantages of rolling over your 401k to an IRA may include missing out on tax savings and legal protection – perks you may receive automatically with a managed 401k. 

Limited Creditor Protection

Protecting your investments is important for your future. You are investing to save for your future and make sure you have that money when you retire. Retirement accounts that qualify under the Employee Retirement Income Security Act (ERISA), usually are protected from creditors, bankruptcy, lawsuits and more. Many employers that offer 401k plans are protected under ERISA, but an IRA is not considered an ERISA account, so it is not protected. 

Loss of Loan Options

Taking out a loan on your 401k is not recommended, but taking a 401k loan can be necessary for some. Reach out to your agent for more information since this may not be an option with all 410k plans.  

Regarding an IRA, the CARES Act allowed more leeway with borrowing from an IRA without penalties after March 2020. If you have an IRA, loans are not allowed, but withdrawals can be done from an IRA without a penalty only in certain situations

Delayed Access to Funds

With some retirement investments[EB4] , there may be a required minimum distribution (RMD) when it comes to taking your money out at age 73. Once you are ready to retire and are over the age of 59 ½ , you can start withdrawing your money. 

Other 401(k) Rollover Options

If your new company offers a 401k, you may be able to rollover your previous 401k to your current one. You will have to reach out to provider of your new 401k to know what steps to take in order to complete this process.

Contact your local Farm Bureau agent today to go over rollover options that best fit you.  


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