Your Options when Leaving a Job with a Qualified Retirement Plan: Option 3 – Rolling the Assets Over into an IRA

This is a continuation of our previous blog post about the options available to you when leaving a job that had a qualified retirement plan, like a 401(k) or a 403(b) or a pension plan. Today, we’ll be exploring the pros and cons of the third option on the table—to roll the qualified savings into an IRA.

Your third option in this situation is to roll your retirement savings into an individual retirement account (IRA), either a traditional IRA or a Roth IRA. There are potentially many benefits here, ranging from investment options to added consolidation of accounts and the simplicity it brings.

Please note that this option can present a conflict of interest for investment advisors. The Securities and Exchange Commission is now requiring more substantial documentation from advisors that individuals have been informed of the pros and cons of rolling their assets into an IRA.

Pros:

First, there is often a wider selection of available investment vehicles in an IRA than there is in a former employer’s 401(k) or in the 401(k) of a new employer. This is particularly the case in the fixed income/bond area of the investment lineup, which is important for investors to consider as they near retirement.

Another benefit of transitioning into an individual retirement account is that you are able to maintain the tax benefits of your previous 401(k) plan—whether it is a traditional 401k or a Roth 401(k). Both are available in IRA wrappers, so you’ll continue to see your savings grow tax-deferred or tax-free as you fund your retirement.

The third and final benefit of rolling your savings into an IRA may just be the greatest help—simplicity. Having one individual retirement account checks the box of having the proverbial “fewer cooks in the kitchen.” This is particularly helpful in the space of investments and IRS qualified accounts. We have too much to keep track of in life already, so we definitely don’t need to have six retirement accounts to keep track of on top of all that.

Cons:

The first is that a 401(k) plan might provide for loans to plan participants. The IRS states that “a qualified plan may, but is not required, to provide for loans. If a plan provides for loans, the plan may limit the amount that can be taken as a loan. The maximum amount that the plan can permit as a loan is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less” (irs.gov). That is, your old 401(k) might offer you the availability of a loan of up to $50,000. That’s a pretty big chunk of change that was on the table beforehand, so investors will need to ask themselves if they may one day need access to a loan of that amount.

The second is that it is possible that the total cost of an IRA is higher than the total cost of a former or new employer’s 401k. You may be paying an adviser to help manage this new account for you, both on the investment decisions and the regular maintenance. In comparing the two alternatives, the additional cost of professional advice should be part of the equation.

When it comes to choosing to launch an IRA versus retaining your former 401(k), there are quite a few factors to weigh. Getting the help of a professional who can give you advice on the best course of action can be massively relieving when making this important decision.

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