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To Rollover or Not to Rollover

Posted November 22, 2022

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With a new year just around the corner, you may be looking at your financial portfolio and looking to make any advantageous adjustments in 2023. Maybe you’re considering opening a Health Savings Account, or you’re starting to think about creating a business exit plan or taking more intentional strides toward saving for retirement.

Clients often ask whether they should roll their 401(k) into an IRA. Before rolling over a 401(k) or other qualified plan account balances to an IRA, it’s critical to weigh the pros and cons of the situation.

As you likely know, both 401(k)s and IRAs have valuable tax benefits and are essential tools to help you save for retirement. However, there are distinguishing differences between the two, such as 401(k)s are offered by employers and IRAs are opened by individuals. Additionally, IRAs typically offer more investments, and 401(k)s offer higher contribution limits (Source: NerdWallet).

Here are the primary advantages and disadvantages when considering rolling over your 401(k) or other qualified plan account balances to an IRA.

IRA Rollover Advantages

  1. IRAs potentially have lower administrative and fund costs than qualified plans (although this depends heavily on your IRA provider, investment adviser, and investment strategy).
  2. IRAs allow you to consolidate multiple accounts and custodians for fewer operational contacts and ease of administration.
  3. IRAs usually offer more choices in investment funds or strategies.
  4. Roth 401(k) balances are subject to required minimum distributions (RMDs), but Roth IRAs are not.
  5. IRA funds may be used to pay for pre-age 59 1/2 penalty-free college expenses; qualified plan funds cannot (such withdrawals are subject to hardship withdrawal restrictions and penalty).
  6. IRA funds may be withdrawn at any time and for any reason (although sometimes with a penalty); Qualified plan hardship withdrawal restrictions are more onerous.
  7. Qualified Charitable Distributions (QCDs) may be made from IRAs, not from qualified plans.
401k rollovers

IRA Rollover Disadvantages

  1. Tax-free “backdoor Roth” conversions become pro-rated if other traditional IRA balances exist.
  2. Qualified plans may have a loan provision; IRAs don’t (this only applies to active participation in a 401(k) plan since this feature is lost after separation from service).
  3. Stable value funds and “GIC” type investment options typically only exist in (some) qualified plans, not in IRAs.
  4. Qualified plan Roth balances, if rolled over to a new Roth IRA, restart the 5-year withdrawal clock (not applicable if rolled into a previously-established Roth IRA in the client’s name).
  5. IRAs can offer less creditor protection than ERISA offers qualified plans. IRA creditor protection is determined by state statute.
  6. Qualified plans have no required minimum distribution requirement for employees if still working past age 72; IRA owners must commence RMDs at age 72 whether working or not.

As you are making plans for 2023, setting new goals, and thinking about the future, consider all the advantages and disadvantages when making choices about your financial future.

As a fiduciary and your partner in prosperity, the Thayer Financial team is ready and willing to discuss your unique financial situation and help you make the best decision. You can visit our website today to schedule your initial consultation with our team.

Thayer Financial, L.L.C. (“Thayer Financial”) is a registered investment adviser offering advisory services in the States of North Carolina, Tennessee, Texas and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This website’s presence on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Thayer Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or according to an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Thayer Financial, L.L.C., unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

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