Moving 401(k) to IRA While Still Employed: A Comprehensive Guide

Introduction

Are you considering moving your 401(k) to an IRA while still employed? This decision can have significant implications for your financial future, so it's crucial to understand the pros and cons before making a move. This comprehensive guide will provide you with the information you need to make an informed decision.

Understanding 401(k)s and IRAs

401(k) plans are employer-sponsored retirement savings plans that offer tax benefits. Contributions are made on a pre-tax basis, reducing your current taxable income. Earnings grow tax-deferred, but withdrawals in retirement are taxed as ordinary income.

IRAs are individual retirement accounts that allow you to save for retirement on a tax-advantaged basis. There are two main types of IRAs: traditional IRAs and Roth IRAs. Traditional IRAs offer tax-deferred growth, while Roth IRAs offer tax-free growth and withdrawals in retirement.

When to Consider Moving Your 401(k) to an IRA

There are several situations when it may make sense to move your 401(k) to an IRA while you're still employed.

• You want more investment options. IRAs typically offer a wider range of investment options than 401(k) plans, giving you more control over your retirement portfolio.
• You're not satisfied with the performance of your 401(k). If your 401(k) has been underperforming or offers high fees, moving to an IRA may allow you to invest in better-performing assets.
• You plan to retire early. IRAs offer more flexibility in terms of withdrawal rules, allowing you to access your funds earlier than the age of 59½ without penalty.
• You're facing a financial hardship. In certain cases, you may be able to withdraw funds from an IRA without penalty to cover unexpected expenses.

Types of IRA Rollovers

There are two main types of IRA rollovers that allow you to move your 401(k) funds to an IRA while still employed:

• Direct Rollover: Your 401(k) administrator transfers the funds directly to your IRA without you ever taking possession of the money. This type of rollover is tax-free and has no waiting period.
• Indirect Rollover: You take possession of the funds from your 401(k) and then deposit them into your IRA within 60 days. Indirect rollovers are also tax-free, but they are subject to a 20% mandatory withholding. You have the option to pay the withholding yourself or have it withheld from the distribution. If you don't redeposit the full amount into your IRA within 60 days, the distribution will be taxed as ordinary income and may be subject to a 10% penalty.

Benefits of Moving Your 401(k) to an IRA

Moving your 401(k) to an IRA can offer several benefits:

• More investment options: IRAs offer a wider range of investment options than many 401(k) plans, giving you more control over your retirement portfolio.
• Lower fees: IRAs often have lower fees than 401(k) plans, which can save you money over time.
• More flexibility: IRAs offer more flexibility in terms of withdrawal rules, allowing you to access your funds earlier than the age of 59½ without penalty.
• Consolidated retirement accounts: Rolling over your 401(k) into an IRA can consolidate your retirement savings into one account, making it easier to manage and track your investments.

Drawbacks of Moving Your 401(k) to an IRA

There are also some drawbacks to moving your 401(k) to an IRA:

• Loss of employer match: If your employer offers a matching contribution to your 401(k), you will lose out on that contribution if you move the funds to an IRA.
• Early withdrawal penalties: Withdrawals from traditional IRAs before the age of 59½ are subject to a 10% penalty, unless you meet certain exceptions.
• Required minimum distributions: In retirement, you are required to take minimum distributions from your IRAs each year once you reach age 72. Failure to take RMDs can result in penalties.
• Taxes on conversions: If you have a traditional 401(k) and you roll it over to a Roth IRA, you will owe taxes on the amount of the conversion.

How to Move Your 401(k) to an IRA

If you decide to move your 401(k) to an IRA, follow these steps:

1. Choose an IRA provider. There are many different IRA providers to choose from, so compare their fees, investment options, and customer service before making a decision.
2. Open an IRA account. Once you have chosen an IRA provider, open an account with them. You can usually do this online or by mail.
3. Request a rollover. Contact your 401(k) administrator and request a direct rollover of your funds to your IRA.
4. Complete the rollover. The rollover process can take several weeks, but once it is complete, your 401(k) funds will be transferred to your IRA.

Conclusion

Moving your 401(k) to an IRA while still employed can be a smart move if you are looking for more investment options, lower fees, and more flexibility. However, it is important to weigh the benefits and drawbacks before making a decision. If you are not sure whether moving your 401(k) is right for you, consider consulting with a financial advisor.

Additional Resources

• IRS Publication 590: Individual Retirement Arrangements (IRAs)
• 401(k) Rollover Guide from the IRS
• IRA Rollover Calculator

Tables

Table 1: Comparison of 401(k)s and IRAs

Table 2: Types of IRA Rollovers

Table 3: Benefits of Moving Your 401(k) to an IRA

Table 4: Drawbacks of Moving Your 401(k) to an IRA