As retirement approaches, older workers face a significant decision about their 401(k) plans. The main options are rolling the savings into an IRA or leaving the money in the former employer's plan. While cashing out is possible, it’s generally less attractive due to taxes and potential penalties.

In 2023, about 25 million households had IRAs with assets rolled over from employer plans, but companies are increasingly encouraging employees to leave savings in their 401(k). The decision requires careful consideration, as both options have different consequences.

Rolling Over to an IRA

• More Investment Options: IRAs offer a broader range of investment choices, including ETFs, stocks, and unconventional assets like real estate.

• Streamlining Accounts: Consolidating multiple 401(k)s into one IRA simplifies financial management, making it easier to track investments.

• Flexible Payouts: IRAs provide more withdrawal flexibility than 401(k)s, allowing retirees to take distributions without hardship demonstrations and purchase annuities.

Sticking with Your 401(k)

• Lower Costs and Fees: Employer-sponsored 401(k) plans often have lower investment fees, especially in large plans.

• Fiduciary Protections: 401(k)s offer fiduciary protections and bankruptcy safeguards that IRAs may not.

• Access to Funds: 401(k)s allow penalty-free withdrawals as early as age 55, and you can delay RMDs if you are still working.

• Simplicity: 401(k)s are less complex, reducing retirees' risk of poor investment decisions.

Other Considerations

Estate planning is crucial. IRA assets pass to a named beneficiary, while 401(k) plans often default to a surviving spouse. Non-spouse 401(k) beneficiaries typically must withdraw funds within ten years.

Ultimately, the choice between rolling over a 401(k) and sticking with it depends on your financial literacy, retirement savings size, and the costs of each option. Larger balances may benefit from IRA options, while smaller balances might find 401(k) protections more advantageous. This decision should be made carefully to safeguard your retirement savings.

Talley's team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.