Helpful tips for your 401(k) and Individual Retirement Accounts (IRAs)


Do you have an employer 401(k) plan or other retirement plan assets? Should you consolidate accounts? Here are some ideas and recommendations to consider.

Benefits of Company 401(k) plans

  • If you leave your money in a company 401(k) plan rather than rolling it into an IRA) is no required minimum distributions (RMDs) if the account owner is still working.  Generally, account holders must start withdrawing from their retirement accounts at age 72. The RMDs at age 72 apply only to traditional IRA accounts and not to Roth IRA accounts.
  • Another benefit of retaining a 401(k) is that the account holder can continue to make contributions to the 401(k) while working even after age 72. If the 401(k) were to be rolled over into an IRA, the client can’t make contributions to the IRA after age 72.
  • While some plan costs are higher than one might expect, administrative costs may be less expensive in the company 401(k). A review of the underlying funds expense ratio plus the plan sponsor fees is important for determining if it’s more beneficial to convert a 401(k) to an IRA or to keep the 401(k) with a previous employer.
  • Company 401(k) retirement plans are protected by the Employee Retirement Income Security Act of 1974 (ERISA) from claims by creditors. Only qualified plans set up under ERISA receive this protection.  For example, Section 403(b) plans offered by state or local governments generally aren’t set up under ERISA and don’t qualify for federal protection.

Benefits of IRAs

  • The major drawback to leaving a 401(k) plan with a previous employer, is that you may be limited to the funds menu if they don’t allow the option of a self-directed brokerage account within the company’s 401(k) plan. If you decide on an IRA rollover, your investment choices are (almost) unlimited.
  • There are no tax consequences when rolling over a 401(k) directly into an IRA account within 60 days, but this must be reported on your individual tax return. Beware, if you receive the funds and reinvest within 60 days, you are limited to one transaction of this nature in a rolling 12-month period.  The best action is to directly roll over the money from the 401(k) plan administrator to you new IRA investment administrator.  You never “touch” the money.  There is no limitation on the number of these transfers.
  • When converting a 401(k) to a Roth 401(k) or when converting an IRA to a Roth IRA, you will need to pay taxes on the full rollover amount. Roth IRA accounts grow tax-free, and withdrawals are tax-free from a Roth IRA as long as the account has been opened for at least five years.
  • IRAs also aren’t protected by ERISA, but they do have some protection under federal bankruptcy law. A rollover IRA of any amount is protected from creditors under federal bankruptcy law up to $1 million indexed for inflation every three years, currently at $1,283,025.  
  • We’re currently in a low tax environment and income tax rates will likely be higher in 2026. The Coronavirus Aid, Relief, and Economic Security Act (CARES) eliminated the RMD for 2020, you can withdraw the RMD amount or more than the amount from 2020.  Rolling over the RMD into a Roth IRA will reduce your clients’ future RMD and the amount of taxes they’ll need to pay in the future because there are no RMDs for a Roth IRA for an account owner.
  • High balances in your IRA and beneficiaries are most affected by the Setting Every Community Up for Retirement Enhancement (SECURE) Act’s 10-year rule. It requires the IRA account to be fully distributed by the end of the 10th year following the year the account owner dies. We recommend spending the money from IRA accounts and leave assets from other accounts to beneficiaries.  Additional life insurance and/or Roth IRA conversions are better assets to leave to beneficiaries because they’re not taxable. The beneficiaries can wait to take distributions until the end of the 10th year.

There are several options to consider and with mindful consideration and professional consultations regarding current tax implications, you’ll be able to make the right decisions for yourself and beneficiaries.