Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays.
As we ring in the New Year, people are often inspired to clean up their finances. One popular move is to roll your old 401(k) plan into an IRA. In many cases this is a good decision — but not always.
For starters, if you plan to retire between 55 and 59.5 then you’ll love the fact that 401(k) withdrawals can be made starting at age 55 vs. 59.5 for IRAs.
Thus, if you do an IRA rollover, your money will be tied up longer if you wish to avoid the 10% early-withdrawal penalty, or you’ll have to jump through hoops to take “Substantially Equal Periodic Payments”.
Second, you’ll want to keep that cash in the 401(k) if you’re hoping to do a “backdoor Roth“. I’ve covered this at length in the past, including all of the hoops that I jumped through to move money from a SEP-IRA into a Solo 401(k) to facilitate Roth conversions.
Third, in some cases 401(k) plans actually have better investment options than are available to you as an individual investor. Of course, many 401(k) plans offer crappy investment options, so this is probably more the exception than the rule.
Finally, if you have appreciated employer stock in your account, you might be better off moving it into a taxable account vs. rolling it into an IRA. The reason for this is that the “net unrealized appreciation” rule allows you to pay capital gains taxes on the appreciation vs. paying ordinary income taxes on the full amount when it’s eventually distributed from the IRA.
In this latter situation, just be aware that you’ll have to pay a 10% early withdrawal penalty if you do this before age 55 (see point #1, above).
This just goes to show you that there are few absolutes in personal finance. While many people would be well-served by rolling over their 401(k) after they leave their job, others would be better off leaving it in place.