(NewsNation) — Workers leaving a job often juggle a number of loose ends, and the most pressing of those is their employer-sponsored 401(k) accounts.
Many people opt to roll their accounts into an individual retirement account, or IRA. While the decision is a logical one, finance experts point out some of the drawbacks to making it.
According to Investopedia, company 401(k)s have what can be compared to a corporate discount. Because the company is investing for so many workers, it can purchase funds at institutional pricing.
The same is not typically true for IRAs.
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A second way a 401(k) is the better option is that it has better legal protections than an IRA. The money in a 401(k) is protected by federal law from most types of creditor judgments.
IRS tax liens and some spousal or child support orders are the exceptions, Investopedia states.
The Bankruptcy Abuse Prevention and Consumer Protection Act can protect IRAs from bankruptcy, but different states vary in their protections from other types of judgments.
Rolling your 401(k) into an IRA is also a disadvantage in an emergency. Employees enrolled in a 401(k) can typically access at least part of their retirement funds early and without penalty.
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According to Investopedia, 401(k) funds can be accessed by workers as early as 55. IRAs cannot be accessed without penalty until the enrollee is 59 1/2 years old.
In addition, company 401(k)s offer stable value funds, which are similar to money market funds but with better rates. These funds are not available to IRAs.
Lastly, if your 401(k) includes company stock that has appreciated well over the years, it is worth transferring into a regular brokerage account instead of an IRA, Investopedia says. While you will have to pay taxes at your current income tax rate, that tax is based on the purchase price of the relevant shares.
How to open a Roth IRA
Experts also offer tips to help you make the right moves if you decide an IRA is right for you. According to Fidelity, one of the biggest pitfalls of rolling over to an IRA is picking the wrong one.
Your choice should depend on the type of contributions you made while at your previous place of employment. A rollover IRA is an account that allows you to roll over your pre-tax 401(k) contributions while keeping the previous account’s tax-deferred status intact.
If your previous plan was a Roth 401(k), which involves after-tax dollars, a Roth IRA is the proper choice.
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A second pitfall is having your 401(k) balance sent to you in check form, which may require taxes to be withheld. In that instance, you may have to make up those taxes before rolling the money over, according to Fidelity.
Instead, save that withheld tax amount by having your previous plan provider send the funds directly to the new provider.
The third suggestion is to follow up on the rollover to ensure that the transfer does not get caught in limbo. Once the transfer is confirmed, be sure to do the work of investing your cash.
IRA investments aren’t automatically made as they are in 401(k)s. The enrollee needs to choose those investments and purchase them or get help from a financial adviser.
