To roll, or not to roll

Steve Merrell |

Q: I am getting close to retirement and I am thinking about what to do with my balance in my company’s 401k plan. Some people tell me to roll it into an IRA when I retire, but others say I should leave it in the 401(k) plan. What do you recommend?

A: It is impossible to make a blanket recommendation about IRA rollovers. Everybody’s situation is different and what is appropriate for one person may be completely wrong for another. So instead of answering your question directly, I’m going to give you the pros and cons of doing an IRA rollover at retirement. Armed with this knowledge, you will be in a much better position to make a decision for yourself. Better yet, I encourage you to discuss it with a knowledgeable advisor.

There are several reasons why an IRA rollover might make sense. One of the most obvious is that consolidating all your qualified retirement accounts into a single rollover IRA will allow you to keep a closer eye on your investments. In my practice, I often come across people who have accounts scattered among several 401(k) plans, plus several different IRAs, Roth IRAs, and taxable accounts. Trying to keep tabs on so many accounts leaves them feeling overwhelmed. Consolidating accounts increases their control and helps them better coordinate asset allocation and portfolio diversification.

Rolling over into an IRA will also give you greater flexibility with your investment selection. A 401(k) plan will always have a fairly narrow menu of investment options. An IRA, on the other hand, can invest more broadly, including in things like income-producing real estate or private companies. However, as I have discussed before in this column, if you invest IRA funds in non-public investments, you need to exercise great caution. The rules on prohibited transactions are not always intuitive and the penalties for getting something wrong can be very severe. Before you use your IRA for a private investment, consult with a knowledgeable advisor.

An IRA will give you greater flexibility when it comes to income planning. For example, an IRA can use individual bonds to created a laddered portfolio or maturity buckets to fund specific financial goals. You can also include guaranteed lifetime income products, like income annuities, in your IRA portfolio—something that was outside the scope of 401(k) plans until the SECURE Act was passed last year.

Unlike 401(k) plans, IRAs have no mandatory tax withholding on distributions. You may still owe taxes on the distribution, but you have more control over when you pay the taxes. IRAs also typically provide more flexibility for beneficiary designations.

Finally, IRAs offer certain exceptions to the additional 10 percent tax levied on early withdrawals when those withdrawals are used for higher education expenses, first-time home purchases, or to pay for health insurance premiums for unemployed individuals. 

These are often the reasons people give for rolling a 401(k) balance into an IRA and for many people these reasons are very compelling. However, there are also several reasons why you might want to leave your money in a 401(k) plan.

First, if there is a chance you will need access to your retirement savings before age 59½, you will probably do better leaving it in a 401(k). Many retirement plans make loans available to plan participants. The maximum loan amount for most 401(k) plans is 50 percent of your vested account balance or $50,000, whichever is less. If 50 percent of your vested balance is less than $10,000, many plans allow you to borrow up to the lesser of your account balance or $10,000.

If you retire or are fired or laid of from your job at age 55 or older, you can withdraw from your 401(k) account without paying the 10 percent additional federal tax you would normally owe on an early withdrawal. If, on the other hand, you continue to be employed by the plan sponsor beyond age 72, remaining in the 401(k) plan will allow you to hold off on RMDs until you retire. IRAs allow no such deferral. This final benefit is not available to individuals who own 5 percent or more of the sponsoring company.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to