Should you stay? Or should you roll? When to rollover your 401(k) assets to an IRA

| Molly Myers, CFP®, CLU

When it comes to managing retirement funds, making the right choices is crucial. Rolling assets from a 401(k) plan into an Individual Retirement Account (IRA) can be a strategic financial decision. Our firm walks clients through the positives and negatives of doing so daily to help clients make the optimal decision based upon their time horizon, risk tolerance, and financial goals.

Advantages of Rolling Assets from a 401(k) into an IRA

  1. When you rollover assets from a 401(k) into an IRA, you typically have a broader range of investment options. Most 401(k) plans will utilize mutual funds or collective investment trusts (CITs) and purposely have a limited menu to reduce liability and control overall plan cost. With an IRA, investors can utilize individual stocks, bonds, ETFs, and potentially alternative investments in addition to mutual funds.
  2. IRAs allow for greater control over investment decisions and withdrawals. IRAs have broader reasons for penalty-free early withdrawals whereas 401(k) are typically limited in when and why individuals can take early withdrawals.
  3. Investments within IRAs can potentially have lower expense ratios when compared with their 401(k) counterparts. Often, mutual funds within 401(k) plans have higher expense ratios or sales loads which help to pay for the expenses of the plan. In an IRA, those expenses may be lower or may not have a sales load.
  4. Consolidating old 401(k)’s into an IRA can help simplify the financial management of your assets as it is easier to track performance as well as make strategic adjustments to your IRA. In addition, having one IRA where everything is consolidated simplifies the required minimum distribution (RMD) calculation and distribution process.
  5. Rolling over your 401K when you first leave the company allows for ease of the plan administrators to sign any appropriate documents.  The longer you wait, the more struggles there are with having someone from the company process the rollover

Disadvantages of Rolling Assets from a 401(k) into an IRA

  1. One major disadvantage to rolling assets from a 401(k) into an IRA is the significant reduction in protection from creditors. Under the Employee Retirement Income Security Act (ERISA), 401(k) accounts are blocked from creditors. The only individuals who could potentially have access would be the IRS or an ex-spouse because of a divorce proceeding. Once funds are in your IRA, it will be dependent on the state you live in to determine the protection of your funds in the account. Some states also have different creditor protection for IRAs and Roth IRAs.
  2. Unlike 401(k) plans, IRAs have no option for a loan. If you have an emergency need, you may miss out on the benefit of being able to take a loan out against your 401(k). You can also not use your IRA as collateral for loan or margin purposes.
  3. Some 401(k) plans can offer specific benefits such as employer stock options or preferred employer stock, which potentially have increased tax benefits available through net unrealized appreciation (NUA) strategies.
  4. Under SECURE 2.0 Act, IRAs have their required minimum distributions (RMDs) starting at 75 in 2024. If you are still working past 75 and actively participate in a 401(k) plan, you may not be required to take distributions from your account.

Rolling over assets from a 401(k) into an IRA can offer significant benefits, particularly in terms of investment flexibility, control, and potentially lower costs. However, it’s essential to consider the potential downsides, including reduced creditor protection, loss of loan options, and the nuances of plan-specific benefits. At Concentric Wealth Management, we consult with each client to understand their unique situation, including their financial goals, risk tolerance, and personal circumstances, should be carefully evaluated to determine the best course of action.