IRA & 401K Rollover/Exit Planning

Contact Us
IRA & 401K Rollover/Exit planning

When an employee leaves an employer, they are able to rollover their 401(k) balance to an IRA. Moving money to an IRA provides a better choice of investment options and allows more control over one’s finances. Rollovers must be done in a delicate manner to sidestep taxes but, in some instances, it is actually more beneficial to leave money in a 401(k).

Reasons to Rollover

Rolling over a retirement account when leaving a job gives the former employee enhanced control. If the account is left with the former employer, it provides some control to the plan administrator. This party’s main objective is to ensure the plan is effective and efficient for the former employer, rather than the employee. The interests of non-employees are not taken into account, so a majority of what the plan administrator does will not benefit the employee.

Rolling the funds over to an IRA ensures the expenses tied to the account’s maintenance actually benefit the account. Furthermore, rolling over funds to the IRA provides more flexibility in terms of investment choices. Most employer plans have a limited number of options. An IRA allows for the investment in multiple types of funds, bonds, stocks etc.

Rolling Over? Proceed Carefully

When rolling over a 401(k) balance, the tax-deferred nature of this investment must be maintained. The IRA should be set up to accept the money and this must be established prior to requesting withdrawal from the existing plan. If there is no place for the money, the plan administrator will assume it is a “cash out” distribution and 20% of the withdrawal will be withheld for income tax. The withdrawal paperwork must indicate a direct rollover will take place. The funds will then be directly sent to the new account or a rollover check will be sent.

Making the Case to go With the 401(k)

Choosing not to roll over to an IRA may be a good decision for some people. As an example, the plan at the former employer might have superior investment options. Some investment options might not be provided to individual investors, yet they are available through the former employer’s plan. If an employee leaves employment at age 55 or older, there is easier access to funds when they are still in the former employer’s plan. One must consider that accessing funds in an IRA prior to the age of 59 ½, results in 10% penalty. Leaving the money in the 401(k) and exiting employment at age 55 or older allows funds to be accessed without penalty.