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Pros and cons of rolling over 401k to IRA

Learn the pluses and the minuses of getting all of your IRA and 401k ducks in a row.

Older couple looking over paperwork

According to the Bureau of Labor Statistics, on average, individuals between the ages of 18 and 52 may change jobs as frequently as 12 times. Some of those jobs probably came with some type of employer sponsored retirement plan such as 401k or an IRA account (SIMPLE or SEP). When switching jobs, many people choose to rollover any accounts to their new employer’s plan rather than taking them as a withdrawal. When you roll over a retirement plan distribution, penalties and tax are generally deferred. So let's look at a few of the pros and cons of consolidating them into one IRA with one institution.

IRA advantages

If you consolidate all your retirement accounts into one IRA, a few of the pros are:

  • Fewer accounts: Managing savings left in multiple plans can be complicated.
  • Simplicity: The process is pretty straightforward. You simply open an account and provide instructions to your old account administrator where to roll the funds over to.
  • No taxes or penalties: A rollover is an avenue to avoid tax penalties for early distribution as compared to cashing out the account value. In a direct 401k rollover, taxes are deferred until you withdraw the money and tax penalties are avoided.
  • Wider investment choices: An IRA offers you the ability to choose a range of investment options. These may include bonds, mutual funds, stocks, index funds and exchange-traded funds or other types of funds.
  • Lower costs: Because of the wider selections of fund choices, IRA providers sometimes have options with the lowest expense ratios.

Disadvantages of an IRA rollover

A rollover is not for everyone. A few cons to rolling over your accounts include:

  • Creditor protection risks. You may have credit and bankruptcy protections by leaving funds in a 401k as protection from creditors vary by state under IRA rules.
  • Loan options are not available. The funds may be less accessible. You may be able to get a loan from an employer-sponsored 401k account, but never from an IRA.
  • Minimum distribution requirements. You can generally withdraw funds without a 10% early withdrawal penalty from a 401k if you leave your employer at age 55 or older. With an IRA you generally have to wait until you are age 59 1/2 to withdraw funds in order to avoid a 10% early withdrawal penalty. The Internal Revenue Service offers more information on tax scenarios as well as a rollover chart.
  • More fees. You may be responsible for higher account fees as compared to a 401k which has access to lower-cost institutional investment funds because of group buying power.
  • Tax rules on withdrawals. You may be eligible for favorable tax treatment on withdrawals if your 401K is invested in company stock.

Neither State Farm nor its agents provide tax or legal advice.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it's important that customers understand their options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees, and any potential penalties.



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