Wealth Management

Whether you’re leaving your job for a new one, retiring or just don’t particularly like your employer’s plan, you may have the ability to gain more control over savings. In this blog, La Ferla Group discusses what a 401(k) rollover is, and when it may be beneficial to roll over a 401(k) into an IRA.

What does it mean to Roll Over a 401(k) into an IRA?

It’s exactly what it sounds like: moving money from your 401(k) to either a traditional or Roth IRA.

It is not required that you transfer all of the money in a 401(k) to an IRA. You may have both types of retirement account.

What are the Tax Consequences of Rolling Over?

Before getting into reasons it may be worth it to roll over a 401(k) into an IRA, let’s break down the tax consequences. Depending on whether you transfer to a Roth IRA or a traditional IRA, the tax implications will be a bit different.

Roth IRA

If you roll over a traditional 401(k) into a Roth IRA, you will generally owe taxes and have to perform what’s called a conversion. However, after you’ve retired, you can make withdrawals from the Roth IRA tax-free since you’ve already paid taxes when you rolled over.

When transferring funds from a Roth 401(k) to a Roth IRA, you will most likely not owe taxes. Roth plans are comprised of post-tax income, so withdrawals in retirement are typically tax-free as well.

401k rollover roth ira

Traditional IRA

Transferring a traditional 401(k) to a traditional IRA usually won’t require you to pay any taxes, since both funds are made up of pre-tax contributions. Once you’ve retired, however, your withdrawals will be taxed.

It is generally not advised to roll over a Roth 401(k) into a traditional IRA, since you already paid taxes on the money in the Roth 401(k). You would then incur more taxes when you make withdrawals from the traditional IRA after you’ve retired.

5 Reasons you May Consider Rolling Over into an IRA

Note: the following are general recommendations to help you understand common situations in which a 401(k) rollover may be worthwhile. In reality, please consult with a Certified Financial Planner™ first.

1. Flexible Investment Options

Employer-sponsored 401(k) plans are often restricted to just a few investment options. IRAs, on the other hand, tend to be more flexible. They usually allow you to allocate your funds into any type of security.

In other words, you can take a more hands-on approach to managing the money in your account based on your goals and financial situation.

2. Pay Lower Fees (Possibly)

Some 401(k) plan administrators charge steep fees for managing your money. Depending on how expensive your 401(k) fees are, switching to an IRA may save you quite a bit of money.

3. The Roth Option

Not all employers who offer 401(k)s make the Roth option available. By rolling over some money into a Roth IRA, you can accumulate money that won’t be taxed when you make withdrawals after you’ve retired.

401k rollover fees

4. Change of Employer

When you change from one employer to another, it’s recommended that you do one of two things with your 401(k):

  1. Roll it over to your new employer’s 401(k) plan
  2. Roll it over into an IRA

What you choose to do will ultimately depend on your new employer’s 401(k) plan. If it will not allow you to achieve your retirement goals, rolling over into an IRA is probably the best option.

5. Retirement

Once you’ve retired, traditional 401(k) plans will eventually make you take required minimum distributions (RMDs). Depending on your financial situation, RMDs may cause unnecessary tax complications. Roth IRAs do not force you to take RMDs.

The factors that go into whether or not it’s best to roll over a 401(k) into an IRA are nuanced. As always, La Ferla Group highly recommends meeting with a Certified Financial Planner™ to determine what’s best for you.

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