You may consider rolling over your company's 401(k) plan into an IRA when you retire. But before you do, consider the advantages of each as outlined below in this article.
Advantages with an IRA:
*Early-retirement: If you're considering early retirement, you can withdraw funds from your IRA before 591/2 without the 10% penalty under the "substantially equal periodic payments rule1." But you must withdraw a specific amount each year using an IRS-approved calculation method. And you must maintain such withdrawals (or distributions) for five years or until you reach 591/2 - whichever is longer!
On the other hand 401(k) plan participants face a 10% penalty if they withdraw funds before they are 591/2.
*Options for beneficiaries: With recent legislation, both spouse and nonspouse beneficiaries of a 401(k) have equivalent options, because the 401(k) beneficiary can now transfer money to an IRA.
Other Penalty-free withdrawal options: An IRA allows penalty-free withdrawals for higher-education expenses and first-time home- buying, which 401(k) plans and other employer retirement plans don't necessarily offer.
*More investment options: IRA owners can have multiple IRA accounts with different investment objectives and can take withdrawals from any of the accounts. Each can have its own beneficiary. Though 401(k) plans may offer a broad range of investment options, the choices generally are limited to one account.
More flexibility in paying fees: Asset management fees levied by your IRA custodian must disclose all fees when the account is opened or when the fee schedule changes. And, as an IRA owner, you can pay the asset management fee out of the IRA account or with funds from a non-retirement account. The latter can used as an itemized tax deduction on your yearly income tax form - Schedule A.
On the other hand, employers pay 401(k) plan administrative fees. If you as a participant are invested in various funds, those fees generally come out at the fund level and largely are buried.
Advantageous unique to your 401(k)
*Reduced taxation on company stock: If you hold company stock that's appreciated significantly, you can pull it out as a lump sum and pay tax on the price you paid for it - not its appreciated value. You can hold that stock; and whenever you sell, you'll only pay low (15%) capital gains tax on the appreciation. Transferring that stock to an IRA would lose that tax break and subject it to normal income tax.
*Early Retirement: Plan participants can withdraw money directly from the plan without penalty if they leave the company after reaching 55. This rule doesn't apply to IRAs.
So before you make any transfer, determine when you wish to retire and how you plan to use your qualified plan money. Then choose whether you your better off transferring your 401K to an IRA or leaving it where it is.
Advantages with an IRA:
*Early-retirement: If you're considering early retirement, you can withdraw funds from your IRA before 591/2 without the 10% penalty under the "substantially equal periodic payments rule1." But you must withdraw a specific amount each year using an IRS-approved calculation method. And you must maintain such withdrawals (or distributions) for five years or until you reach 591/2 - whichever is longer!
On the other hand 401(k) plan participants face a 10% penalty if they withdraw funds before they are 591/2.
*Options for beneficiaries: With recent legislation, both spouse and nonspouse beneficiaries of a 401(k) have equivalent options, because the 401(k) beneficiary can now transfer money to an IRA.
Other Penalty-free withdrawal options: An IRA allows penalty-free withdrawals for higher-education expenses and first-time home- buying, which 401(k) plans and other employer retirement plans don't necessarily offer.
*More investment options: IRA owners can have multiple IRA accounts with different investment objectives and can take withdrawals from any of the accounts. Each can have its own beneficiary. Though 401(k) plans may offer a broad range of investment options, the choices generally are limited to one account.
More flexibility in paying fees: Asset management fees levied by your IRA custodian must disclose all fees when the account is opened or when the fee schedule changes. And, as an IRA owner, you can pay the asset management fee out of the IRA account or with funds from a non-retirement account. The latter can used as an itemized tax deduction on your yearly income tax form - Schedule A.
On the other hand, employers pay 401(k) plan administrative fees. If you as a participant are invested in various funds, those fees generally come out at the fund level and largely are buried.
Advantageous unique to your 401(k)
*Reduced taxation on company stock: If you hold company stock that's appreciated significantly, you can pull it out as a lump sum and pay tax on the price you paid for it - not its appreciated value. You can hold that stock; and whenever you sell, you'll only pay low (15%) capital gains tax on the appreciation. Transferring that stock to an IRA would lose that tax break and subject it to normal income tax.
*Early Retirement: Plan participants can withdraw money directly from the plan without penalty if they leave the company after reaching 55. This rule doesn't apply to IRAs.
So before you make any transfer, determine when you wish to retire and how you plan to use your qualified plan money. Then choose whether you your better off transferring your 401K to an IRA or leaving it where it is.