Is an IRA Rollover Always the Right Choice?

Are you one of the millions of Americans who uses an employer 401(k) as your primary retirement savings vehicle? The 401(k) is a widely-used retirement savings vehicles. Most 401(k) plans offer tax-deferred growth and matching employer contributions. Those two elements can help you quickly accumulate retirement assets.

If you leave your employer with vested balance in the plan, you may face a decision about what to do with your 401(k). Conventional wisdom is to roll the 401(k) balance into an IRA. When you do a rollover, you avoid taxes and penalties, and you may gain access to a wider menu of investment options.

A rollover may not necessarily be the right strategy for you, though. There are certain situations in which you could be best served by keeping your balance in the 401(k) plan. Below are three such instances. If you might face any of these situations in the future, you may want to consider your options carefully before moving forward.


Early Retirement

Tax deferral is one of the key features of qualified retirement accounts like 401(k) plans and IRAs.  When an account is tax-deferred, you don’t pay taxes on your investment growth as long as the funds stay inside the account. Instead, you pay income taxes when you take withdrawals in the future.

The trade-off for this tax deferral is that you must use the accounts for saving for retirement. The IRS enforces this rule by prohibiting withdrawals from qualified plans before age 59½. If you take a distribution before that point, you could face a 10 percent early distribution penalty.

Participants in a 401(k) plan can take early distributions and avoid the penalty, though. If you leave your employer and stop using the 401(k) after age 55, you can take distributions without paying the penalty. You will still pay taxes on the distributions, but you’ll avoid the early distribution penalty. You may not have the same flexibility if your roll your 401(k) funds into an IRA.


Appreciated Company Stock

Do you own company stock in your 401(k) plan? Many companies offer company stock as an investment option in their plans. If you have purchased company stock in the plan over a long period of time, that stock may have appreciated in value.

An IRA rollover can create tax challenges with regard to your appreciated company stock. All distributions from a traditional IRA are taxed as income. When you sell the stock inside the IRA and then withdraw the funds, you create an income-taxable event.

However, you could use a strategy called net unrealized appreciation to reduce the tax burden. This strategy is available to use with company stock held inside a 401(k) plan. With net unrealized appreciation, you can distribute the stock from the plan and pay income tax on the basis, while paying the capital gains rate on the accumulation. That could lead to a reduced tax bill. A tax professional can help you further explore this option.


Work After 70 1/2

Don’t plan on retiring anytime soon? More and more workers are choosing to work into their late 60s and even their 70s. If you’re one of those workers, you could benefit from keeping your funds in your 401(k). Many qualified plans, with the exception of the Roth IRA, require you to take mandatory distributions starting at age 70½.

However, there’s an exception to this if you continue to work past age 70½ and are a participant in a 401(k) plan. You aren’t required to take distributions, and you can even keep making contributions and receiving employer matching contributions. If you roll your funds into an IRA, you will be required to take distributions at age 70½, regardless of whether you are still working.

Wondering whether you should keep your funds in a 401(k) or roll them into an IRA? Let’s talk about it. Hal Hammond in Sarasota welcomes the opportunity to help you analyze your needs and goals, and then develop a strategy.


Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

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