What to Look Out for Before Flipping Your 401 (K)
When you leave work, it seems natural to bring your 401 (k) with you. But in some cases, it makes sense to leave it where it is if you can. Before turning a 401 (k) into an IRA, there are several important factors to consider.
Consumer Reports points out a number of considerations to consider before upgrading to the old 401 (k).
First, you must consider commission versus flexibility and profitability. They report a 2011 study that found IRA account holders pay more than 401 (k) members. This may be true, but there is often more flexibility with an IRA. Thus, you can get higher returns by offsetting commissions if you know how to build a simple investment portfolio for beginners .
Apart from this, there are a couple of other possible factors:
What is the cost of the renewal?
There are no tax implications for a direct transfer from your 401 (k) to an IRA. But if the company handling your new IRA doesn’t manage a competitor’s fund from your 401 (k), you will have to sell it in order to buy something new. Ask your advisor about the cost of this transaction.
Where can I save more on taxes?
Withdrawals from 401 (k) s and IRAs are taxed equally. You must start the compulsory minimum distribution from both before April 1st of the year after you turn 70.5 years old. (Exception: if you are still employed, you do not need to take RMD from your employer’s 401 (k)).
But transferring 401 (k) shares of the company to the IRA does not entail such favorable tax treatment, says Jerry Love, an accountant and financial planner based in Abilene, Texas. He cites the example of $ 5,000 in a 401 (k) stock of a company that rose to $ 20,000. When this amount is transferred to the IRA, it will all be subject to the normal income tax rate on withdrawal. But if you transfer $ 20,000 to a regular investment account rather than an IRA, only the initial $ 5,000 is subject to regular income tax. The remaining $ 15,000 will be taxed on sale at a potentially lower capital gains tax rate. “This is a great tax planning opportunity,” says Love.
Of course, you should also be aware of the different rules between 401 (k) and IRA. We’ve detailed the process , and if you’d like more information on the factors to consider, be sure to check out the full Consumer Reports publication below.
Switching to an IRA? First, ask these five questions | Consumer reports