Dust off that old 401(k) and…now what?
Consider these factors before choosing a rollover IRA.
- Investment Options — Compare the list of investments available for your 401(k) plan—or any employer-sponsored plan, like a 403(b) — with the list available for an individual retirement account (IRA). Many IRAs offer a broader range of investments, such as stocks, exchange-traded funds and mutual funds, than employer-sponsored plans. Then again, those plans sometimes offer investment choices negotiated just for those employees.
- Fees & Expenses — Paying more to invest eats into any potential gains. Take a good look at your current investment-related expenses and any management fees. Compare those to IRA expenses, such as Capital One Investing's Pricing and Rates.
- Service — Understand which services you're paying for now, and compare that to what you actually use. Your employer-sponsored plan's services may include investment advisors, education and other services. If you want to take the lead with a rollover IRA, even low-cost brokers like Capital One Investing may offer free planning and assessment tools.
- Withdrawals — Depending on your age, some plans allow penalty-free withdrawals after you leave that employer. Usually you'll pay a tax penalty for withdrawing anything from an IRA before you hit age 59½.
- Protection from Creditors/Legal Action — Most employer-sponsored plans have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. State laws vary a lot around how to treat IRA assets in lawsuits.
- Required Minimum Distributions (RMD) — First of all, a distribution is just a withdrawal, and the "minimum" part refers to a dollar amount. Basically, an RMD is a minimum amount you must withdraw from your plan at a certain age. Some plans don't have RMDs as long as you still work for that employer. RMDs for Traditional IRAs start up at age 70½, whether you're working or retired.
- Employer Stock — If you own stock in your current employer, and it's gone up in value, rolling that stock to an IRA will trigger some tax consequences you may not want. If your shares of stock just roll directly into an IRA, any gains are taxed as ordinary income, but not until you make withdrawals. If you leave those shares in the employer-sponsored plan, any gains are taxed as long-term capital gains—typically a lower tax rate than ordinary income tax.
There's always more to learn, so consult your tax or financial advisor about what might work best for you.
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