When Is A Rollover IRA The Right Decision?

23 July 2015
 Categories: , Blog


Rolling over your old 401(k) or other pre-tax retirement account into an IRA can provide a number of advantages – primarily the flexibility to choose your own funds and investments and the portability to allow you to combine or roll over additional retirement accounts. However, there are some situations in which you may be better off keeping your existing 401(k) or other retirement account rather than creating an IRA rollover. Read on to learn more about some of the factors you may want to consider when streamlining your retirement accounts.

What is a rollover IRA? 

Many employers offer a variety of retirement planning options for employees, including a 401(k) (or 457 or 403(b) for certain public employees). Your employer may provide you with a match if you pledge to contribute a certain amount of your gross pay to your 401(k). You'll also usually have the option to invest additional funds into a traditional or Roth IRA. 

When you invest in an employer-held 401(k), you're usually limited to the investment options set out by your employer's plan. Once you leave employment, you may elect to roll over your 401(k) balance into an individual retirement account (IRA). Creating a rollover IRA with a brokerage firm can provide you with a broader array of investment options, often with lower fees than the 401(k) investment options provided by many employers. 

If you've changed employers a number of times during your career, you may have several 401(k)s – creating a rollover IRA can allow you to combine all these accounts into one, simplifying your finances (as well as your taxes once you retire and begin drawing these funds down). And although you're currently limited to contributing $5,500 per year to your traditional or Roth IRA (or $6,500 if you're over 50), rolling over existing 401(k) funds into an IRA won't affect this contribution limit. 

When might you want to keep your existing retirement account?

There are a few situations in which rolling over your retirement balance may not be the best idea. For example, if you have an old 457 from a previous government or public service position, these funds can be withdrawn without penalty upon separation of employment – unlike 401(k)s, IRAs, and other pre-tax retirement accounts that can't be tapped until you turn 59.5. If you'd like to retire early, keeping funds accessible in a 457 may be your most cost-effective option.

In other cases, your former employer may have access to better or lower-cost investment options than you can find through a brokerage firm – if you find yourself in this situation, the convenience of transferring these funds to a rollover IRA may be outweighed by the increase in investment returns through a lower-fee fund.