Broker Check

IRA Rollover vs Employer 401k

8 Questions to Ask Yourself

If you have recently changed jobs leaving behind a 401k balance at your previous employer you likely are weighing your options. Should you leave it or move it to an IRA? Here is a list of 8 of some of the most important questions you should ask yourself when considering this issue.

  1. Is control of my account important to me?
    Ongoing service of your 401k account will continue to be provided by your employer and their selected investment platform. Ongoing service of your IRA account would be provided by the financial advisor or investment institution you select.

  2. Is investment choice important to me?
    Many 401k plans offer a limited number of investment choices. IRAs tend to allow a much broader choice of investment selections. If choice is important to you, look closely at the investment options available in your 401k to determine if they are sufficient.

  3. How much do I value regular feedback and personalized advice regarding my retirement savings?
    401k plans may offer more limited personal assistance and advice than working with a financial advisor helping you establish a Rollover IRA. Advisors are generally available to meet with you personally on a regular basis to discuss your account. They also may be able to assist in consolidating advice and management of additional assets outside the 401k account.

  4. Am I between ages 55 and 59 1/2?
    Employees separating from their employer between ages 55 and 59 ½ are generally able to withdraw from their 401k plan without penalty. Withdrawals from an IRA between ages 55 and 59 ½ generally are subject to 10% early withdrawal penalty. All withdrawals are subject to normal income taxes.

  5. Am I concerned about creditor protection?
    Both IRAs and 401ks generally offer substantial credit protection. 401ks typically are entirely excluded from bankruptcy proceedings while IRAs are typically excluded up to a cap of $1 million. Rules do vary by state, so be sure to verify the specific rules for your state.

  6. Do I understand how to compare fees and expenses?
    It is impossible to say whether a 401k or IRA is more or less expensive than the other without examining the actual fees and expenses associated with your individual accounts. The financial advisor or investment institution recommending an IRA will disclose the associated fees and expenses. Your 401k, by law, is required to disclose expenses and fees associated with the plan on an annual basis. This information may also be obtained by requesting a copy of the Plan Document from your employer.
  7. Do I own employer stock in my 401k plan?
    Employee stock held within a 401(k) plan is eligible to take advantage of net unrealized appreciation strategy. Depending on your individual circumstance, this may allow for distributions to be taxed at a lower rate than your ordinary income tax rate. Distributions from IRAs will be taxable as ordinary income.
  8. Am I familiar with my other options?
    A Rollover IRA is not the only option to compare versus leaving a 401k balance behind in a previous employer's 401k plan. You could take a lump sum cash distribution and liquidate your account. But remember, cash distributions will be subject to ordinary income tax and an additional 10% penalty if you are under age 59 ½. In many circumstances, you might also have the ability to roll your previous employer's 401k plan into the 401k plan of your new employer. You should check the rules of your new employer's 401k plan to determine eligibility.

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