401k IRA Rollover - the Issues of Taxes and Age

You're approaching your retirement or are already there. Where do you turn with all of individual contributions both you and your employer have made for your 401(k)? Would you perform a 401k IRA rollover? Have you ever had to deal with a 401k IRA rollover? Have no fear. Our easy to follow advice regarding a 401k IRA rollover will assist you in figuring your next move.

You essentially have two options. You can preserve your retirement funds in the 401k as-is or choose the 401k IRA rollover. However, consider a few of the implications about the 401k IRA rollover.

Under an IRA, you are able to invest your money in a number of investment options - there are very few limitations. You are in direct control of your account. However, money withdrawn from an IRA is taxed at regular tax rates which may be up to 35% and never in the lower capital gains rates. And you'll pay a 10% penalty to take distributions before you turn 59½, unless of course you are eligible for an IRA penalty exception.

The two negative aspects of an IRA covered above - complete taxation of withdrawals at ordinary income rates and restrictions of withdrawals prior at age 59 1/2 - are handled more preferably with a 401k account. Therefore,if the above issues are high priority for you, skipping a 401k IRA rollover would be the best course.

In the case of age, 401k plans offer an advantage. You are permitted to access your 401k assets after your separation from service in or after the year you reached age 55. You do not need to comply with the requirements of rule 72t as you would with early IRA distributions.

As to taxes, 401k plans also offer an advantage with regards to shares in your company held in your 401k plan. Even if you performs a 401k IRA rollover with other assets, if you take distribution of your company shares, you will pay tax on the basis of those shares (their original cost) but later upon sales, only pay capital gains rates. If the gains are significant, the lower capital gains rates could save many thousands of dollars.

If under age 59 1/2, you will need to pay the 10% additional tax on the basis of the shares. Typically, this is a small cost in relation to the money saved later when the shares are sold.

So while 401k IRA rollovers are popular due to the increased investment flexibility, there may be good reason to leave the funds in your 401k account.