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Should You Roll Over Or Play Dead? 7 Factors

If you’re changing jobs and you have accumulated assets in a 401(k) or another tax-favored company plan, there are several things you can do. You might roll over the funds to an IRA or to a retirement plan with your new employer, spend the money, or leave the money where it is. If you meet all of the legal requirements for a rollover, the transfer is completely tax-free.

Assuming that you do not need the money right away, this decision often boils down to choosing between an IRA rollover and keeping the status quo. Which one is best for you? Every situation is different, but here are seven criteria to help you make up your mind:

1. Investment options. Most IRAs offer a wider range of investments than you'll find in a typical 401(k) or other company plan. However, in some cases, an employer-based plan may provide more flexibility than you will have as an investor in an IRA. The key question is how well your choice matches up with your retirement planning objectives.

2. Fees and expenses. Don't overlook the importance fees can play. Even paying a relatively modest 1 percentage point more can reduce your retirement nest egg by tens of thousands of dollars over time. Frequently, employer plans have lower fees than IRAs because the company has a lot of assets with a provider and is able to negotiate a better price. Or your company may shoulder some of the cost.

3. Services. The flip side of what you pay in fees is what you get for your money. Sometimes, higher fees may be justified if you're receiving good value. That might include access to investment guidance, educational materials, full brokerage services, or financial planning tools.

4. Fiduciary protections. Employer-based plans are covered by ERISA (Employee Retirement Income Security Act). Under ERISA, various protections are afforded to plan participants, among numerous requirements. Notably, plan fiduciaries are required to act in their best interests of participants. These fiduciary responsibilities apply to assets rolled over into an IRA.

5. Distribution rules. Because a 401(k) plan can restrict withdrawals, you may have to satisfy the plan’s definition of "financial hardship" to get access to your funds before retirement. But you don't have to jump through any hoops to obtain an IRA distribution. Just be aware that withdrawals from an IRA, as well as from a 401(k) or other plan, are generally taxable as income. In addition, a 10% penalty tax is imposed on withdrawals from IRAs and 401(k)s before you reach age 59½, unless one of a handful of special exceptions applies. With both kinds of plans, you generally have to begin taking withdrawals after age 70½.

6. Borrowing power. If you have a dire need for cash, you generally can borrow from a 401(k) plan within generous limits. Also, when you repay the loan, the interest and principal go back into your account. (But not all 401(k) plans permit loans.) Technically, you cannot borrow from an IRA, although you can get 60 days of interest-free use of funds by taking a withdrawal and then making a timely deposit back into the IRA. That technique can be used only once a year.

7. Estate planning. If you're fortunate enough not to need the money in your 401(k), you might roll over the funds to an IRA, which would enable your heirs to "stretch" out payments over a longer period of time than you're allowed with a 401(k). A 401(k) plan requires a spouse to be the primary beneficiary (unless the spouse agrees to an alternative), but with an IRA you can name your children as beneficiaries if you prefer. Thus, the IRA may offer greater flexibility for estate planning purposes.

Are those the only considerations? Not by a long shot. This brief article covers only a few of the basic factors that may influence your decision. And there's another option that may be available to you—to transfer the funds into a Roth IRA, rather than into a traditional IRA. Although you'll pay income tax on the conversion, future payouts from a Roth IRA are usually tax-free, plus you're not required to take distributions during your lifetime.