When you are leaving your job or considering a career change, you may find yourself with a sizable sum of money saved in your 401(k) or other type of retirement plan. Because this money could play such an important part in your financial future, it is important for you to understand your options. One such option you may be familiar with is a rollover to an IRA.
While there are many benefits to rolling money over to an IRA, such as having the opportunity to invest your savings in a broader range of investments or advisory programs, or having the option to withdraw the assets at any time when needed, there are also several reasons why a rollover to an IRA might not be right for you. Some of the things to consider are:
Will you reach age 55 by December 31 in the year you terminate your current employment? If so, penalty-free withdrawals may be paid directly to you from the plan (20% federal tax withheld), whereas penalty-free withdrawals from IRAs do not begin until age 59½ (penalty exceptions may apply).
Is creditor protection high on your priority list? An employer-sponsored plan may offer greater creditor protection than an IRA.
Are you concerned about starting required minimum distributions (RMDs) at age 72? While you are still working, RMDs may be delayed until you retire from the employer sponsoring the plan, if the plan allows. Plan participants who are 5% or greater owners of the business do not qualify for the delay.*
Is there a possibility that you may need a loan in the foreseeable future? While employer-sponsored plans may offer loans, they are not permitted in IRAs. A rollover to a new employer’s plan that allows loans may be the suitable answer here.**
Do you have employer stock with a low cost basis in your retirement plan? If so, distributing the shares to a non-IRA account could save you significant taxes by making a net unrealized appreciation (NUA) election.
Are you under the age of 59½ and receiving these assets as part of a divorce settlement through a Qualified Domestic Relations Order (QDRO)? Ex-spouses (Alternate Payees) may take penalty-free withdrawals from the plan (20% federal tax withheld). This option is forfeited if plan assets are rolled to an IRA.
Are you under the age of 59½ and a participant in a 457(b) plan? If yes,
* The CARES Act of 2020 waived RMDs for the 2020 tax year.
** The CARES Act of 2020 allows for a withdrawal from an IRA of up to $100,000 for COVID-19-related hardships, to be paid back within a three-year period.
Decisions to roll over or transfer retirement plan or IRA assets should be made with careful consideration of the advantages and disadvantages, including investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and your unique financial needs and retirement planning. Neither Stifel nor Stifel Financial Advisors provide recommendations with respect to rollovers from an employer-sponsored retirement plan. Once you inform your Stifel Financial Advisor that you have chosen to roll your retirement assets to an IRA with Stifel, your individual investment needs can be addressed. You should consult with your tax advisor regarding your particular situation as it pertains to tax matters.