401(k) versus IRA: three factors to consider when you retire
Congratulations! After working hard and saving your whole career, you’ve decided to retire. What should you do now with the money in your 401(k) plan? Should you keep your savings in your 401(k) or move your savings to an IRA? We’ll explain a few of your options and highlight three factors to consider when making your decision.
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Options and tax implications for 401(k)s and IRAs
During your career, you may have worked for a few different companies, which means that you could have more than one retirement account. Keeping track of your statements, balances, and investments can be overwhelming. It might make sense to consider combining your accounts so it’s easier to manage your money. But you’ll need to know the rules before deciding which account to add the others to.
With a 401(k), you have options when you retire:
- Keep your money in your 401(k)—If you’re happy with how your account is doing and the fees are reasonable, you may decide to leave your money right where it is. Or, if you’re still working and about to retire, you could consolidate other 401(k) accounts with your current employer’s plan. Moving money directly from one 401(k) account to another is generally not taxed, and you can keep building your retirement savings without paying taxes until you make a withdrawal.¹
- Move your 401(k) balance(s) into an IRA—Moving your 401(k) money into an IRA is a popular option. IRAs tend to offer investment options that aren’t available in 401(k) accounts. When you move your money directly from a 401(k) to an IRA through a rollover, you likely won’t be taxed.
- Take a cash withdrawal—You may want to use some of your savings for a big purchase such as buying a second home. But you should think about your long-term goals, spending habits, and income because although you’re retired, you may want to give the money in your accounts more opportunity to grow. Remember that your savings need to last throughout your retirement years. And depending on the type of account you’re taking it from, you may owe taxes.
Factors to consider when choosing between a 401(k) and an IRA
When it comes to deciding on a 401(k) or an IRA, there are three key factors for you to think about:
- Fees—Are there any fees? Sometimes retirement plans and IRAs charge for things such as recordkeeping and maintaining your account. Mutual funds may also have fees, especially if you don’t keep the shares for a certain amount of time. It’s important to understand what fees you may be charged, which can usually be found in the investment option’s prospectus and the plan’s 404a-5 participant fee disclosure document.
- Investments—What investments are available to you? It’s great to have a variety of choices available to help you balance your risk and find options at different costs. You can research specific investments by looking at the fund’s website to learn more.
- Risk tolerance—When you’re close to retirement or retired, you may want to think about how much risk you’re willing to take. It might make sense to pick less risky investments so that your savings aren’t as affected by changes in the stock market. Look closely at the investment options in 401(k)s or IRAs to make sure you’re comfortable with the investment options that are available.
Benefits and drawbacks of combining your accounts into a 401(k) or IRA
401(k)s
Benefits |
Drawbacks |
| Continued tax-deferred savings | Investments limited to those offered in the plan |
| Protection from creditors | Plan rules dictate how and when a distribution can be taken |
| Access to funds once retired | Required minimum distribution (RMD)—You’re responsible for making sure you withdraw your RMD each year once you reach RMD age |
IRAs
Benefits |
Drawbacks |
| Continued tax-deferred savings | No creditor protection |
| Easy access to funds | RMD—You’re responsible for making sure you withdraw your RMD each year once you reach RMD age |
| Can still contribute to the account if you earn income in retirement (subject to contribution limits) | Investments limited to those offered by the IRA’s custodian |
| Usually a greater choice of investment options to choose from (mutual funds, ETFs, CDs) |
Deciding between 401(k)s and IRAs when you retire
You spent decades saving for retirement. Now that you’re getting ready to retire, it’s time to weigh the benefits and drawbacks of your options and figure out what to do with all your savings. Before making your final decision, you may want to consult with a licensed financial professional.
There are advantages and disadvantages to all rollover options. You are encouraged to review your options to determine if staying in a retirement plan, rolling over to an IRA, or another option is best for you.
1 Ordinary income taxes are due on withdrawal. Withdrawals before the age of 59½ may be subject to an early distribution penalty of 10%.
Important disclosures
This material does not constitute tax, legal, plan design, or investment advice and is not intended for use by a taxpayer for the purposes of avoiding any IRS penalty. Comments on taxation are based on tax law current as of the time we produced the material. Prospective purchasers should consult their independent tax, investment, and legal professionals for more information. Our representatives and affiliates may receive compensation derived from the sale of products and services.
The content of this document is for general information only and believed to be accurate and reliable as of the posting date but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
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