Is a Rollover IRA Right for You?
Leaving a job triggers an important decision: what to do with your 401(k). Unlike the employer-sponsored pensions of earlier generations, 401(k)s are portable and are yours to take with you when you change jobs or retire. You may be able to leave any 401(k) savings in a prior employer's plan indefinitely, but doing so may make keeping track of your broader assets more difficult than it needs to be.
For many, consolidating savings—either by moving an old 401(k) to a new employer's plan or by transferring accounts into a rollover IRA—can help ensure their savings continue to work in harmony as they build toward a comfortable retirement.
What is a rollover IRA?
A rollover IRA is a special type of IRA designed for assets being transferred from a qualified workplace retirement plan, such as a 401(k) or 403(b) plan. When you request a direct rollover of 401(k) assets to a rollover IRA, you maintain the tax benefits of your retirement savings and potentially gain more flexibility in how to invest your nest egg. Your savings may continue to grow on a tax-deferred basis until you begin taking qualified distributions, typically at age 59½ or later.
Which IRA is right for you?
What are the pros and cons of a rollover IRA?
Before choosing a rollover IRA, take some time to carefully consider the potential benefits and drawbacks.
Potential benefits of a rollover IRA
- Access a broader range of investment choices—potentially at lower costs.
- Potentially reduce 401(k) account fees for non-employees.
- Reduce your number of logins.
Potential drawbacks of a rollover IRA
- You may not be able to move the money back into a 401(k) plan sponsored by a future employer.
- Some 401(k) plans may accept money from a rollover IRA while others may not. Plan guidelines can vary among different employers.
- Some 401(k) plans may allow you to take loans against your savings. IRAs do not offer this feature.
- RMDs for rollover IRAs start at age 73 (or 75 if born in 1960 or later), while some 401(k) plans may allow you to delay RMDs beyond that age if you're still working.
- The costs of a rollover IRA may not necessarily be lower than your old 401(k) plan. If you're considering moving an old 401(k) balance to a rollover IRA, review the costs associated with your old 401(k) plan as well as those associated with a potential rollover IRA account.
- Generally, money in a 401(k) cannot be touched by creditors or lawsuits outside of bankruptcy. However, depending on your state's laws, IRAs may be only partially protected from creditors.
- If you purchased your company's stock in your 401(k), rolling the shares into an IRA may negate the tax benefits of net unrealized appreciation (NAU). The topic is complex, so speak with your financial advisor about it.
What are your options for simplifying your retirement savings?
When facing an inflection point in your career or your life, take a holistic look at what you're trying to accomplish before making any decisions about how to manage your 401(k). You have several available options for maintaining the tax-advantaged status of your 401(k) savings.
Changing jobs
If you're changing jobs, you can leave your 401(k) savings in your former employer's plan, move the balance to your current employer's plan (if your current employer's plan allows it), or move it to a rollover IRA.
You can also have the funds paid directly to you. It's generally better to avoid this unless you're experiencing a financial hardship. If you receive the money directly before age 59½, you'll owe taxes and penalties on the withdrawals and lose out on the potential for future tax-advantaged growth.
Retiring
If you are retiring, you may be able to leave your 401(k) savings in your former employer's plan or move the money to a rollover IRA. At age 59½, you can begin taking qualified withdrawals from a 401(k) or a rollover IRA. At age 73, most people will typically begin taking required minimum distributions (RMDs) from either type of account.
Keeping your retirement savings on track
If you're considering a rollover IRA, weigh the pros and cons before opening an account. Start with the big picture, identify what you hope to accomplish, and gather enough data to make a more informed decision. Keeping up with your 401(k) savings over a lifetime can help improve your retirement readiness.
And if you lack the time, interest, or expertise to manage your retirement funds—or simply prefer to outsource the management of your account to an expert because you have complex financial needs or assets—consider working with a wealth advisor who can manage your retirement funds on your behalf.
Read next
Next article: 3 Easy Steps to Move Your 401(k) to a Rollover IRA
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This material is intended for informational purposes only. This should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions.
For illustrative purposes only.
Investing involves risk, including loss of principal.
This information is not a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager, Estate Attorney) to help answer questions about specific situations or needs prior to taking any action based upon this information.
A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available options which may include but not be limited to keeping your assets in your former employer's plan; rolling over assets to a new employer's plan; or taking a cash distribution (taxes and possible withdrawal penalties may apply). Prior to a decision, be sure to understand the benefits and limitations of your available options and consider factors such as differences in investment related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.