By rolling over an ex-employer’s retirement plan into an IRA, you maintain the tax-deferred status of your retirement account. Also, your new IRA will allow you to consolidate all of your ex-employer’s retirement accounts into one account, making it easier to manage your retirement investments. A significant advantage of using a rollover to fund an IRA versus leaving your retirement assets with an ex-employer is increased investment flexibility. Other advantages include:
- More Control
When the rollover process is complete, you’ll no longer be restricted by the rules and policies of your former employer's retirement plan. In addition, you can avoid potential problems seen with some retirement plans such as untimely statements, lack of account information, limited investment options and any risk of the plan getting tangled in a bankruptcy matter should the former employer encounter financial troubles.
- Avoid Withholding and the Tax Risk
If you request a check from your employer-sponsored retirement plan, your employer will have to withhold 20% for federal income taxes. Unless you initiate a direct rollover to an IRA or transfer into a new employer’s plan, you will need to come up with the 20% from your own pocket in order to avoid taxes and early withdrawal penalties. By requesting a direct rollover to an IRA, you can avoid the withholding and the risk of missing the 60-day deadline.
- Keep Your Money
By rolling over funds or assets, you will maintain the tax-deferred status of your retirement money, and best of all, you won’t have to pay taxes on your earnings until you withdraw the money. If you request a check from your employer-sponsored retirement plan, your employer will have to withhold 20% for federal income taxes.
- Greater Investment Diversification
Your previous employer’s plan probably had between 10-15 mutual funds from which to choose. By completing an IRA rollover, you will increase your investment options and improve your investment flexibility.
- Accessibility
Because you cannot take a loan out against your IRA as permitted by some 401(k) plans, penalty-free withdrawal options are available with IRAs for events such as a first-time home purchase or certain education expenses.
- Estate Planning
By naming a beneficiary on your IRA, that beneficiary would be able to take payouts from the inherited IRA over his or her life expectancy, thus stretching the life of the IRA account. Many employer-sponsored retirement plans require non-spouse beneficiaries to take a one-time lump distribution.
- An Opportunity for Roth Conversion
The income limitation that once prevented many individuals from converting to a Roth IRA no longer applies. Now all individuals are eligible to convert regardless of their Modified Adjusted Gross Income (MAGI). Although a Roth conversion is a taxable event, a tax professional can help you determine if the potential long-term tax advantages of converting outweigh the short-term tax consequences.
Learn more about rollovers at Fund My Account.