So, what’s the big idea behind a rollover IRA? With a rollover IRA, the retirement dollars you have saved so far within your company’s retirement plan, like a 401(k), can be moved to your own Individual Retirement Arrangement, or IRA. The rollover IRA is simply a pre-tax, traditional IRA that has been funded by you changing jobs or retiring from a company. Since this is a direct rollover, there are no tax consequences at this point, since you’re not withdrawing funds, but rather moving them from one type of tax-deferred account to another.
Although you may have the opportunity to roll your 401(k) or retirement plan to a rollover IRA, you have a few other options as well. Many times you can keep your retirement dollars in the current plan. The potential advantages of this option may include continued tax deferred growth, no early withdrawal penalties, creditor protection, and possibly lower fees than an IRA. The potential disadvantages of leaving your 401k at your former plan may include limited investment options, limited types of distributions, and some plans do not offer investments designed to provide a long-term retirement income.
A third option is to rollover your funds into your new employer’s plan. This can also offer continue tax deferred growth, possibly lower fees than an IRA, and the ability to consolidate assets into one place. The potential disadvantages are again, limited investment options and limitations with features and services in the new employer's plan.
The fourth option is to take the retirement money as cash. The potential advantage is that you will have access to your assets at any time. The potential disadvantages can include taxation of all pre-tax amounts in the year of distribution and a 10% early distribution tax applies, if under age 59½, unless you have an exception.
The decision to roll your investments to an IRA should be made based on your personal circumstances. If you choose to do a rollover IRA, you have a vast array of investment options opened up to you, instead of the limited number of investments normally found in a company plan. The potential disadvantages of a rollover to an IRA include no plan loans, possibly higher fees than an employer plan, and services may be more limited than offered in the employer plan. If done correctly with a trusted advisor, a rollover IRA can help you plan now for the long-term, as well as mitigate risk for your personal situation.
What makes the most sense for you at this stage in your retirement journey?
Information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Withdrawals from Rollover IRAs prior to age 59 ½ may result in a 10% IRS penalty tax.