The pros and cons of rolling over your 401(k) at 59½ while still employed

[UNITED STATES] The decision to roll over a 401(k) after reaching 59½ while still employed is not a one-size-fits-all solution. It requires careful consideration of your individual financial situation, retirement goals, and the specific features of your current 401(k) plan. Let's delve into the factors that should influence your decision and explore the potential benefits and drawbacks of rolling over your 401(k) at this stage in your career.

Before diving into the pros and cons of rolling over your 401(k), it's essential to understand what the 59½ rule means for your retirement savings. At age 59½, you can withdraw funds from your 401(k) without incurring the 10% early withdrawal penalty imposed by the IRS. This age marks a significant turning point in your retirement planning strategy2.

A 401(k) rollover involves transferring the funds from your employer-sponsored 401(k) plan into another retirement account, typically an Individual Retirement Account (IRA). This process can be done without triggering immediate tax consequences if you move the funds directly from one qualified retirement account to another1.

Benefits of Rolling Over Your 401(k) After 59½

1. Increased Investment Options

One of the primary advantages of rolling over your 401(k) to an IRA is the broader range of investment options available. While 401(k) plans often have limited investment choices, IRAs offer access to a vast array of stocks, bonds, mutual funds, and other securities.

2. Greater Control Over Your Retirement Savings

By rolling over to an IRA, you gain more control over your retirement funds. You can choose your preferred financial institution and have the flexibility to manage your investments according to your risk tolerance and retirement goals.

3. Potential for Lower Fees

Many 401(k) plans come with administrative fees and expenses that can eat into your returns over time. By rolling over to an IRA, you may be able to reduce these costs, especially if you choose a low-cost brokerage firm.

4. Simplified Management

If you've changed jobs multiple times, you might have several 401(k) accounts with different employers. Rolling these into a single IRA can simplify your retirement account management and make it easier to track your overall retirement savings.

Drawbacks and Considerations

1. Loss of Certain 401(k) Benefits

While rolling over your 401(k) offers advantages, it's crucial to consider what you might be giving up. Some 401(k) plans offer unique benefits that may not be available with an IRA:

Loan Options: Many 401(k) plans allow you to borrow against your balance, a feature not typically available with IRAs.

Creditor Protection: 401(k) plans often offer stronger protection against creditors compared to IRAs.

Delayed Required Minimum Distributions (RMDs): If you're still working at age 73, you may be able to delay RMDs from your current employer's 401(k) plan, a benefit not available with IRAs.

2. Potential for Higher Fees

While many IRAs offer lower fees, this isn't always the case. Some large employers negotiate favorable fee structures for their 401(k) plans. Before rolling over, compare the fees in your current plan with those of potential IRA providers.

3. Impact on Future Financial Strategies

Rolling over your 401(k) to an IRA may impact your ability to implement certain financial strategies in the future. For example, if you're considering a Roth conversion ladder or backdoor Roth IRA contributions, having pre-tax IRA funds can complicate these strategies.

Expert Insights on 401(k) Rollovers After 59½

Financial experts emphasize the importance of carefully evaluating your individual circumstances before making a decision. According to a recent Forbes article, "The decision to roll over a 401(k) after age 59½ while still employed should be based on a thorough analysis of your current financial situation, retirement goals, and the specific features of your existing 401(k) plan."

When assessing the benefits and drawbacks of a rollover, investment possibilities, fees, loan provisions, and creditor protection must all be taken into account. Consulting with a financial advisor can give helpful insights suited to your specific circumstances.

Steps to Take Before Rolling Over Your 401(k)

If you're considering a 401(k) rollover after 59½ while still working, here are some essential steps to take:

Review Your Current 401(k) Plan: Understand the fees, investment options, and any unique benefits your current plan offers.

Compare IRA Options: Research different IRA providers, considering their investment options, fees, and customer service.

Consult a Financial Advisor: A professional can help you evaluate the tax implications and long-term impact of a rollover on your retirement strategy.

Consider Your Employment Plans: If you're planning to retire soon, it might make sense to wait and roll over your 401(k) after leaving your job to simplify the process.

Evaluate Your Overall Retirement Strategy: Ensure that a rollover aligns with your broader retirement goals and risk tolerance.

The Importance of Timing and Tax Considerations

Timing can be crucial when it comes to 401(k) rollovers. If you're considering a rollover to a Roth IRA, remember that this will trigger a taxable event. The funds you convert will be added to your taxable income for the year, potentially pushing you into a higher tax bracket.

Additionally, if you're approaching age 73 (the age for Required Minimum Distributions as of 2023), you might want to consider how a rollover could affect your RMD strategy. While 401(k) plans may allow you to delay RMDs if you're still working, IRAs require RMDs regardless of employment status.

Alternative Strategies to Consider

Instead of a full rollover, you might consider these alternatives:

Partial Rollover: You could roll over a portion of your 401(k) to an IRA while keeping some funds in your employer-sponsored plan.

In-Service Distribution: Some 401(k) plans allow for in-service distributions after age 59½, enabling you to withdraw funds without penalties while still employed and contributing to the plan.

Roth Conversion: If your 401(k) plan allows, you might consider converting some of your traditional 401(k) funds to a Roth 401(k), providing tax diversity in retirement.

The decision to roll over your 401(k) after 59½ while still working is a significant one that can have long-lasting impacts on your retirement savings. While the increased investment options and potential for lower fees make rollovers attractive, it's crucial to weigh these benefits against the potential loss of unique 401(k) features and the impact on your overall financial strategy.

Remember, there's no one-size-fits-all answer. Your decision should be based on a thorough evaluation of your current financial situation, retirement goals, and the specific features of both your current 401(k) plan and potential IRA options. Consulting with a financial advisor can provide valuable insights and help you make the best decision for your unique circumstances.

Ultimately, whether you choose to roll over your 401(k) or keep it with your current employer, the most important factor is that you continue to actively manage and grow your retirement savings. By staying informed and making strategic decisions, you can maximize your retirement nest egg and work towards a financially secure future.