Retirement Planning Blog

Answers to Frequently Asked Questions Regarding Financial Planning

Should I Rollover my 401k to a Roth IRA?

Posted by Mark Snyder | May 18, 2017 2:00:00 PM

Simple Moves = Potential Benefits

A 401(k) plan can be a great way to save for your financial future, especially if you have recently changed jobs, are planning to retire relatively soon, or have already retired. In any event, be cautious about making any 401(k) decisions and always speak with an independent financial advisor to examine all of your options before going ahead.

          Generally speaking, maintaining your account’s tax-advantaged status will almost always work in your favor. Tax-deferred growth is a great way to build long-term wealth, but retirees and pre-retirees need to be careful whenever considering a 401(k) plan maneuver in order to get the maximum potential benefit from it. If your plan allows, you may wish to leave the assets in your old 401(k) plan. This can be the easiest choice if your retirement is relatively close and you think you may need access to funds in the plan.

Choices, Choices and Choices

          Employees leaving the workforce after age 55 can often make penalty-free withdrawals from their 401(k) accounts. Some plans require that you maintain a minimum balance. Similarly, you should be familiar with the plan’s fees and other distribution provisions. As income taxes will most likely apply it is best to talk with an independent financial advisor before taking 401(k) withdrawals – there may be a more cost-effective way for you. Caveat: do not confuse a 401(k) plan with an Individual Retirement Account (IRA). Although they have similar features, IRA withdrawals are typically not permitted without penalty until age 59 1/2.

          Job changers may also be able to “roll” 401(k) account assets into their new employer’s plan. This will preserve the tax-advantaged status but there can be a “waiting period” before funds can be transferred. Talk with your new employer’s Human Resource representative. If you are still saving for retirement it may be advisable to consolidate your 401(k) assets into the plan administered by your new employer. “Cashing out” of your 401(k) is almost never advisable; not only will you immediately owe income tax on withdrawn funds, but you may also be subject to a 10% tax penalty if you are under age 59 1/2 (although there can be exceptions if you leave employment after age 55), and furthermore, any funds withdrawn will lose their tax-deferred growth potential – arguably one of the greatest tools to help you reach your retirement goals.

         However, if you would like greater opportunities for your retirement plan, such as more portfolio diversity or the possibility of more competitive fees, consider rolling your 401(k) into an IRA.  An IRA can frequently provide a wider variety of investment choices, tax-advantaged growth potential, and more flexibility. Such choices may make it easier to create a targeted, long-term investment portfolio. Bear in mind when it comes to IRA withdrawals and distributions, income taxes may apply in addition to early-withdrawal penalties for those under age 59 1/2. As IRAs generally furnish easier retirement-asset management, it can pay to consider the potentially significant differences in investment options and management fees between employer-sponsored plans and IRAs. While comparing options, keep in mind that preserving the tax-advantaged status can substantially improve your ability to build wealth over time.

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Written by Mark Snyder