Pros and Cons of 401(k) to IRA Rollover

Estimated reading time: 3 minutes(Last Updated On: April 13, 2021)

If you’ve recently left your employer, you may be wondering what to do with the funds in your old 401(k). Besides keeping it in the account, there are a few other options you’ll want to consider. No one option is perfect for everyone, so you will need to reflect on your specific situation and discuss the best choices with your financial advisor before moving any funds. If your new employer doesn’t offer a retirement benefit package or you’re now self-employed, you’re probably considering rolling over your funds into an IRA. Take a look at some of the pros and cons regarding this decision listed below.

    1.  Fees. IRA fees are usually lower than 401(k) fees, but this all depends on the size of the company offering the 401(k) and how hands-on or hands-off you choose to be with your IRA. A 401(k) most often includes free investment advice and financial assistance, but you may no longer qualify for this benefit if you aren’t a current employee. You will have to compare all of the costs, benefits, and fees between the two accounts you’re considering to know for sure which one is more cost effective.
    1.  Investment Options. Typically an IRA will provide you with more investment options than an employer 401(k) will. If you have expertise in a certain niche you’d like to invest in or would like to diversify your investments through bonds and mutual funds, an IRA may be the right option for you. However, some investment options can only be found in a 401(k). If you like your current investment, you may not be able to find it outside of your 401(k).
    1.  Distribution Age. If you are currently still working for the employer your 401(k) is through, you may take penalty-free distributions once you retire no earlier than age 55. If you are working for a different employer, you may take distributions at age 55 from an old employer 401(k) if you still have an account with them. If you retire before age 55 or are still working for the same company at 55, you may have to wait until 59 ½ to take distributions on your 401(k). Some plans even prohibit distributions from a 401(k) if you’re still working at 59 ½. The earliest you can take a penalty free distribution from an IRA is 59 ½. Once you turn 72, you will be required to take minimum required distributions from a traditional IRA. Most people won’t have to take distributions on a 401(k) until April 1st of the year after they officially retire, whenever that may be.
  1.  Borrowing from the Account. Some 401(k) accounts allow owners to borrow up to 50% (or a maximum of $50,000) from the account without penalty, unlike an IRA. The loan provision benefit from a 401(k) usually only applies to current employees since the repayment, plus a low interest, is taken directly from each paycheck. Loans from an IRA are prohibited, although there are some circumstances that allow owners to use funds on special expenses, such as college tuition or a down payment on a first home, without incurring the 10% early withdrawal penalty. However, it is difficult to replace those funds once withdrawn since the annual contribution limits are so low.

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