Transferring Your 401k

As seen in the Fort Bend Independent

Over time, transferring your 401k has evolved from a multi-step process involving approvals from you, your company and the 401k provider, to as little as a phone call today. In some cases, providers even offer you the ability to execute transfers online.

But while the ease of rolling over your 401k to an IRA has improved, determining when and where to move your money is just as complex as it ever was. Obscure tax rules and high fees can dissuade an account owner from taking any action at all, which has led to the thousands of “orphan 401ks” that are sometimes forgotten by their owners. Below, we tackle some of the advantages, disadvantages and “need-to-knows” of transferring your 401k.


10-Percent Early Withdrawal Penalty Tax

If you are younger than 59 ½ and take a distribution from your IRA, you will likely be subject to a 10-percent penalty tax on the total value of the withdrawal. This is in addition to the income tax you will owe.

401k accounts are subject to different rules. If you retire from your company at age 55 or older, you can take distributions directly from the 401k without incurring the penalty tax, even if you are younger than 59 ½. This may not be a concern if you have significant assets outside of your 401k or IRA, but if the vast majority of your savings is in tax-qualified accounts, you may want to consider leaving your 401k where it is until you are 59 ½.


Company stock

Some companies allow you to purchase company stock within your 401k. When you retire, you may be able to distribute the stock directly from the 401k to an after-tax account through a unique tax rule called Net Unrealized Appreciation (NUA). The advantage of using NUA is that you only pay income tax on the basis of the stock (or what you paid for it). If you bought the stock at a very low price, the tax you pay may be low relative to the size of the total distribution.

Once the stock is distributed, you can either hold it, in which case you will pay no additional tax, or you can sell it and pay capital gains taxes on the difference between the basis and the current price. At all income levels, capital gains taxes are lower than income taxes.


Investment options

In almost all cases, rolling over your 401k to an IRA will provide you will more investment opportunities. Most 401ks have around 20 investment choices, with a few having more than 40 and some with as little as 10. In comparison, large brokerage firms such as Charles Schwab and TD Ameritrade offer thousands of investments options, including many strategies and assets classes that are rarely found in 401ks.


Required Minimum Distributions

At age 70 ½, the IRS requires you to begin taking distributions from your IRA each year. This is called the Required Minimum Distribution (RMD). To calculate your RMD, take the value of your IRAs and 401ks as of December 31 of the previous year and divide by a factor provided by the IRS (which is determined based on your life expectancy).

The lone exception to this is you may delay distributions from a current 401k if you are working at age 70 ½ or older. However, you must take distributions from your IRAs, even if you are working.



The types of fees charged in your 401k vary from those in an IRA, but that does not necessarily mean they are higher or lower. For example, a 401k may charge an account maintenance fee, but have lower mutual fund expenses than many of the funds available in an IRA. An IRA may charge transaction fees for trading, while a 401k may limit how often you can trade. Fees are best evaluated on a case-by-case basis.

There are many nuances and details that should be considered when evaluating whether to keep your 401k or roll it into an IRA. It is important to make a choice based on your financial situation and ability to control your investments. Contact your local fee-only financial advisor to determine what the best options are for you.


WJ Interests, LLC has provided fee-only financial advice to individuals, families and businesses since 1996. For more information, please contact us at wj@wjinterests.com or 281-634-9400.




Back to List