I understand that a lot of you are facing layoffs, and many of your colleagues are eager to rollover their 401(k)s into an IRA. However, our HR person has advised us to carefully consider our options before making any decisions. So, why wouldn’t someone roll their 401(k) into an IRA?
Your 401(k) After Leaving a Job
First and foremost, it’s important to note that most workers do not need to take any immediate action with their 401(k) after leaving a job. If your vested balance is over $5,000 (or $7,000 starting in 2024), you can simply leave those funds where they are.
Reasons to Keep Your Money in the 401(k)
It’s natural to feel a sense of anger and frustration when facing a layoff, which often leads people to want to cash out their 401(k). However, there are several factors to consider that might make leaving the money in your 401(k) a smart move. Let’s explore a few common ones:
Penalty Waiver for Early Withdrawals
If you’re older than 55 (or 50 for qualified public safety employees) but younger than 59 ½, there’s an important advantage to leaving your money in the 401(k). Even if you separate from service before turning 55, if it happens in the year you turn 55 or later, you may tap into your 401(k) without paying the 10% penalty typically imposed for withdrawing funds before the age of 59 ½. This penalty waiver is not available for IRAs, so rolling over into an IRA might result in a penalty if you need access to your funds.
Quality of Investments
Consider the quality of the investments available within your current 401(k) plan. Some plans offer an excellent selection of low-cost investment options, which might not be the case with all IRAs. This tends to be more prevalent in larger plans.
Creditor Protection
Creditor protection is another crucial aspect to consider. In general, 401(k)s are federally protected, while IRAs are safeguarded under state laws that can vary from one state to another.
By carefully evaluating these factors, you can make an informed decision about whether rolling over your 401(k) into an IRA is the right choice for you.
Rolling Funds from a 401(k) to an IRA
You no longer have to wait until you are laid off or quit your job to move your money from a 401(k) to an Individual Retirement Account (IRA). Many plans offer “in-service distributions” once workers reach 59 ½. While there are several differences between 401(k)s and IRAs, let’s focus on a few common reasons why rolling funds to an IRA might be advantageous.
Better Investment Options
One of the most compelling reasons to roll over to an IRA is the desire for better investment options. While some 401(k) plans offer a wide selection of low-cost investments, many others do not. This is especially true for smaller plans that may have limited choices or high fees. With an IRA, you have access to a much larger universe of investment options, giving you greater control over your portfolio.
Customizable Beneficiary Designations
Another advantage of rolling funds to an IRA is the ability to customize beneficiary designations. Some 401(k) plans have restrictions on how funds can be distributed after your passing. If your wishes do not align with the plan’s limitations, transferring your funds to an IRA allows you to designate beneficiaries according to your preferences.
Flexible Distribution Options
Many people find that IRAs provide more flexible options for administering distributions. The paperwork tends to be simpler, and there are typically fewer restrictions on frequent payout intervals or tax withholding preferences. This can make managing your retirement funds easier and more convenient.
It’s important to note that the information provided here is for informational purposes only and not a substitute for personalized financial advice. If you have specific questions or concerns, it is best to consult with a financial advisor who can guide you based on your unique circumstances.
Email Dan for more information regarding this topic.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.
