Is a 401(k) Rollover Always the Right Decision?

Does much of your retirement savings exist inside your company’s 401(k) plan? You’re not alone. The 401(k) is one of the most commonly used retirement savings vehicles. Your 401(k) plan likely offers tax-deferred growth and matching employer contributions. The combination of those two components can be a powerful recipe for retirement asset accumulation.

When and if you ever leave your employer, you may face a tough decision as to what you should do with the balance. The common advice is to roll the 401(k) balance into an IRA. When you do a rollover, you avoid taxes and penalties, and you may gain access to a wider menu of investment options.

However, a rollover isn’t always the best option. In many cases, a rollover is the most appropriate strategy. But there are certain instances in which you may be best served by keeping your balance in the 401(k) plan.

Below are three such instances. If you might face any of these situations in the future, you may want to consider your options carefully before moving forward.


Early Retirement

Qualified plans such as 401(k)s and IRAs are popular because they offer tax deferral. That means you don’t pay taxes on your investment growth as long as the funds stay inside the account. Instead, you pay income tax when you take distributions, which means you can delay taxes on your growth until you retire.

The trade-off for this tax deferral is that you must use the accounts for retirement purposes. That means you generally aren’t allowed to take distributions from your qualified accounts until age 59½. If you take a distribution before that point, you may face a 10 percent early distribution penalty.

There are exceptions to this rule, however, including an important one for 401(k) participants. If you leave your employer and stop using the 401(k) after age 55, you can take distributions without paying the penalty. You will still pay taxes on the distributions, but you’ll avoid the early penalty. You may not have the same flexibility with an IRA.


Company Stock in Your 401(k)

If you’re like many workers, you may have used a portion of your 401(k) funds to purchase company stock. Depending on how long you’ve been in the plan, that stock may have accumulated substantially over time.

If you roll your 401(k) into an IRA, you will have to pay income tax on the full stock value as you withdraw it from the account. However, you can take it out of the 401(k) using a strategy known as net unrealized appreciation. That means you can distribute the stock from the plan and pay income tax on the basis and capital gains taxes on the growth. That could result in a much lower tax bill as compared with a distribution from an IRA.


Working Beyond Age 70½

More and more workers are choosing to work into their late 60s and even their 70s. If you’re one of those workers, you could benefit from keeping your funds in your 401(k). Many qualified plans, with the exception of the Roth IRA, require you to take mandatory distributions starting at age 70½.

However, there’s an exception to this if you continue to work past age 70½ and are a participant in a 401(k) plan. You aren’t required to take distributions, and you can even keep making contributions and receiving employer matching contributions. If you roll your funds into an IRA, you will be required to take distributions at age 70½, regardless of whether you are still working.

Wondering whether you should keep your funds in a 401(k) or roll them into an IRA? Let’s talk about it. Contact us today at TB Financial. We welcome the opportunity to help you analyze your needs and goals, and then develop a strategy. Let’s connect soon and start the conversation.


Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

16768 – 2017/6/20

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