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Advantages and disadvantages of rolling over to an IRA

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

Older couple looking over paperwork

According to the Bureau of Labor Statistics, you might have had up to 11 jobs between the ages of 18 and 48. Some of those jobs probably came with a 401(k) or an IRA account (SIMPLE or SEP) as a perk. This can create a lot of accounts to manage. So let's look at a few of the pros and cons of consolidating them with one institution.

Some advantages of consolidating

  • Maintain tax- deferred status of your retirement savings as compared to cashing out the account value.
  • Avoid tax penalties for early distribution as compared to cashing out the account value.
  • Choose from a range of investment choices that may be broader than those offered by an employer plan.
  • The more retirement accounts you have, the harder it may be to keep track of your money.

Some disadvantages of consolidating

  • You may be able to get a loan from an employer-sponsored 401(k) account, but never from an IRA.
  • You can generally withdraw funds without a 10% early withdrawal penalty from a 401(k) 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.
  • You may be responsible for paying a sales load.
  • A 401(k) may provide access to lower-cost institutional investment funds because of group buying power.
  • You may be eligible for favorable tax treatment on withdrawals if your 401(k) is invested in company stock.
  • A 401(k) may provide greater protection from lawsuits and creditors.

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

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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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