Should You Roll Your 401(k) Over into an IRA?

In most cases, it is beneficial to do such a rollover because of the advantages offered by an IRA.  However, in certain cases it might make sense to leave the funds in the original account.  Read on:

Early retirement choices – Unlike in a 401(k), penalty-free withdrawals may be had from an IRA before age 59 1/2 under the “substantially equal periodic payments” rule.  This rule allows an account owner to make withdrawals of a specific amount over the longer of a period of five years or until attaining age 59 1/2.

More favorable beneficiary options – Some employer sponsored plans require non-spouse beneficiaries to take withdrawals from the plan over a five year period, lessening the opportunity for tax-deferred growth and triggering more income tax.  With IRAs, non-spouse beneficiaries may “stretch” withdrawals over their lifetimes, creating tremendous growth potential for younger beneficiaries.

Penalty-free withdrawals – With IRAs, these are allowed for higher-education expenses and first-time home buying.  Not so with employer plans.

Greater investment choices – Some employer plans have limited investment options, and only one account is permitted.  IRAs offer much more freedom in choosing investments, and different accounts with different investment strategies (and/or beneficiaries) may be set up.

Fee payment options – IRA administrative fees may be deducted from the account, or may be paid from non-retirement funds.  The latter type of payments, which are not allowed in employer plans, are deductible as a miscellaneous itemized deduction.

Advantages of Employer Plans:

Reduction of capital gains in company stock – company stock moved out of a 401(k) into a non-retirement account is taxed based on the value of the stock when purchased, rather than the date of transfer.  If the stock is first moved to an IRA, this tax break is not available.

Penalty-free withdrawals at age 55 – employees who cease employment at 55 (or anytime before 59 1/2) can take penalty-free withdrawals starting immediately.  Except for the substantially equal periodic payments rule, IRA account owners must wait until 59 1/2.

Avoidance of North Carolina income taxes – Certain retired government workers can claim an exemption from state income for their retirement plan payments.  If the account was rolled over into an IRA, the exemption would not be available.