If you left a job or are planning to, it can make sense to opt for a 401(k) rollover into a traditional IRA. Leaving the employer where you started the 401(k) means you can’t contribute to it or earn an employer match, so rolling it over to an IRA gives you more options.
There are some perks: You won’t incur taxes until you withdraw money, you can access many different kinds of investments and you can withdraw early without a penalty for certain expenses.
Despite the benefits, there are some situations where rolling over your 401(k) to a traditional IRA isn’t the best choice. Here are some of the reasons you might rethink your 401(k) rollover:
You’re a high-income earner
If you earn up to $135,000 of modified adjusted gross income (if you’re single,) or up to $199,000 for married filing jointly, you can contribute to a Roth IRA. This is often a better option for high-income earners because it means you’ll be able to withdraw money tax-free when you retire. (You will pay taxes when you invest the money into the account, however.)
What about if you earn more than modified adjusted gross income levels? You can still contribute to a Roth IRA through a loophole called a backdoor Roth conversion. That means your money is first contributed to a traditional IRA, and then rolled over into a Roth IRA. You can read more about that process here.
There are also mega Roth conversions, which allow you to contribute up to $36,500 annually using after-tax money. See my video about mega Roth conversions here.
You want to take advantage of your 401(k) stable value fund
Older investors might prefer the security of the stable value fund feature in their 401(k), and choose not to do a 401(k) rollover. This is an investment option that is only available for tax-qualified plans, which means IRAs are excluded
A stable value fund is a portfolio with fixed-income securities, similar to bond funds. But it’s different from a bond because it is contracted with banks or insurance companies to protect its rate. This system preserves liquidity and delivers bond-like returns without as much risk.
This low-risk investment option is best for older investors or anyone coming up on retirement within the next five years. If you want that level of investment protection, it might be best to hang onto your 401(k) and take advantage of the stable value fund instead of rolling over your account.
You need to withdraw money earlier
The age to withdraw without penalty fees from an IRA is 59 ½. If you plan on retiring sooner than that, some 401(k)s do allow for withdrawals at age 55. This is usually through the “rule of 55,” but it is pretty specific. In order for the rule of 55 to apply to you, you have to have stopped working for the company that held the 401(k) when you were 55. (There are some exceptions for certain public safety employees.) However, you do not get that benefit if you rolled your 401(k) into an IRA.
Rolling over your 401(k) into an IRA can be very beneficial, but only in the right circumstances. You can read more about retirement fund rollovers here.
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.