Pros and cons of rolling over 401(k) to IRA

When you are considering the pros and cons of rolling over a 401(k) to an Individual Retirement Account (IRA), the decision often comes down to taxes, fees, investment choices and withdrawal rules. A rollover may help you consolidate retirement accounts in one place, but it is not always the best option for every person.

According to the U.S. Bureau of Labor Statistics, individuals in the 1957–1964 baby boomer birth cohort held an average of 12.9 jobs from ages 18 to 58, and over 40 percent of these jobs were held from ages 18 to 24. Many workers who change jobs may encounter employer-sponsored retirement plans such as a 401(k) and consider rollover options instead of cashing out.

What a rollover usually means

Many people roll over when they leave an employer. In a direct 401(k) rollover, the money typically moves from trustee to trustee from your 401(k) to an IRA. For eligible rollovers, this process is generally structured to help you avoid taxes and early withdrawal penalties at the time of the transfer.

Your rollover destination can also depend on what type of 401(k) you have:

• A Traditional 401(k) usually rolls to a Traditional IRA.
• A Roth 401(k) may roll to a Roth IRA.
• If you convert between Traditional and Roth accounts, conversion rules and potential taxes may apply.

Quick overview table

IRA advantages

If you consolidate retirement accounts into one IRA, a few potential pros are:

• Fewer accounts: managing savings in multiple plans can be complicated.
• Potential tax deferral: for eligible rollovers, taxes and early withdrawal penalties are generally avoided at the time of the rollover and are typically handled when you withdraw later.
• Wider investment choices: an IRA may offer a range of investment options such as bonds, mutual funds, stocks, index funds and exchange-traded funds.
• Lower costs for some investors: fees vary by provider and investments, but some IRA setups can be cost-competitive.
• More consolidated recordkeeping: can be easier to monitor and rebalance when your retirement assets are in one place.

Disadvantages of an IRA rollover

A rollover is not for everyone. A few common cons to consider include:

• Creditor protection risks: employer 401(k) plans often have strong federal creditor protection under ERISA, while IRA protections can depend on the type of IRA and other factors.
• Loan options are not available: many 401(k) plans offer participant loans, but IRA loans are generally not available in the same way.
• Required minimum distribution rules: many Traditional IRAs have required minimum distributions later in retirement based on the Internal Revenue Service (IRS) rules.
• Early withdrawal penalties may apply: with IRAs, withdrawing before age 59 and a half may trigger a 10% penalty unless you qualify for an exception.
• More fees for some accounts: IRA fees and expenses can vary. Depending on the provider and investments, total costs may be higher than a low-cost employer plan option.
• Tax rules on company stock: if your 401(k) holds employer stock, the tax outcome of rolling over or withdrawing may depend on specific details, so it can be helpful to review your options carefully.

IRA rollover key considerations

Before you roll over 401(k) to an IRA, consider whether a rollover is the right fit for your situation. Confirm whether your 401(k) plan allows a rollover and whether it can be completed as a direct 401(k) rollover. Also review:

• What fees apply to the IRA account you are considering?
• What investments are available to fund the IRA?
• How does the move affect withdrawal rules later, including required minimum distributions?

Frequently asked questions

Q: Should I roll my 401(k) into an IRA?
A: Many people consider a rollover for consolidation and investment choice. The better option depends on your current plan options, potential fees, withdrawal needs and how important creditor protection and loan access are to you.

Q: Will I pay taxes if I roll over a 401(k) to an IRA?
A: In many eligible rollovers that follow the IRS rules, such as a Traditional 401(k) to a Traditional IRA, taxes are generally deferred until you withdraw later. If the rollover involves a Roth 401(k) or a conversion, tax treatment can differ.

Q: Do IRAs have required minimum distributions?
A: Yes, Traditional IRAs have required minimum distributions later under IRS rules. Roth IRAs generally have different distribution rules.

Q: Can I borrow from an IRA like I can from a 401(k)?
A: Generally, no. Most IRAs do not offer loans the way many 401(k) plans do. Instead, accessing money usually involves withdrawals, which may trigger income taxes and a 10% early withdrawal penalty unless you qualify for an exception. With Roth IRAs, contributions are often withdrawable tax- and penalty-free, while earnings generally have different rules.

Q: What should I check if my 401(k) includes company stock?
A: Company stock can have special tax rules. How your rollover or withdrawal is taxed can depend on your plan’s options and the distribution rules, so it’s important to review the details before acting.

Consider connecting with your State Farm agent to help you with your unique goals.