Thinking about an IRA Rollover?

E*TRADE Securities2

If you’ve changed jobs or retired, you’ve been through quite a few changes recently. One decision† you may be mulling is whether to roll over the assets in your former employer’s retirement plan into an IRA. Below we’ll explore four key factors that may impact your decision to remain in your former employer’s plan or to roll into an IRA.

Your situation 

If you are currently working for the employer who sponsors your plan, you are not eligible to roll over into an IRA unless you are over age 59½. However, if you have changed jobs or retired, you may roll the assets in your former employer’s plan into an IRA any time, at any age. 

Your age

If you are between the ages of 55–59½, you may want to consider leaving the money in your former employer’s plan for now. That’s because you may be eligible to take any needed distributions without incurring the normal 10% early withdrawal penalty. You can then roll to an IRA after age 59½ and continue taking penalty-free withdrawals.

Type of retirement plan

Generally speaking, assets in all pre-tax employer-sponsored retirement plans are eligible to be rolled over to a Rollover IRA or a Roth IRA.

  • If you choose a Rollover IRA, you will maintain the tax-deferred status of the funds and owe no taxes on the transfer.
  • If you roll into a Roth IRA, this is a taxable event. You will owe ordinary income tax on the amount of the transfer when you file your tax return.

One exception: If you have a Roth 401(k), you cannot roll over the assets to a Rollover IRA, but you are eligible to roll into a Roth IRA. Since the Roth 401(k) assets were after-tax contributions, the rollover to a Roth IRA is also non-taxable.

Company stock

There are special tax considerations if you hold company stock in a retirement plan. Transferring the shares to a taxable brokerage account may be a better option than rolling them over to an IRA. This strategy is called net unrealized appreciation (NUA). NUA is the difference between the price paid for the shares (or cost basis) and the stock’s current price.

Here’s how it works:

Withdraw company stock in the form of shares, not cash, and deposit them in a regular brokerage account instead of an IRA. Although you’ll have to pay ordinary income tax on the cost basis (and a 10% early withdrawal penalty if you’re under age 59½), NUA is taxed at long-term capital gains rates and only when the stock is sold, regardless of holding period. This can provide a significant tax advantage if your company stock is highly appreciated, because if it was rolled into an IRA, the entire value would eventually be taxed as ordinary income. Any other assets you hold in the employer plan can be rolled into an IRA and retain their tax-deferred status.

Once you’ve considered the above factors, you should also weigh the additional benefits of rolling to an IRA. For example, in an IRA, there is generally a wider choice of investments, many with lower costs, than the ones provided by an employer’s plan. You could also roll over your retirement assets into an existing Traditional or Roth IRA and enjoy consolidated investment management in one account. If rolled to a Traditional or Rollover IRA, you can continue to enjoy tax-deferred growth on earnings, avoid 20% withholding on any cash-outs, and would not experience any immediate taxation. If rolled to a Roth IRA, the amount initially rolled over would be taxable, however, you would be able to withdraw earnings tax-free after age 59 ½, provided the account has been open for at least five years.

Another option is to leave the money in your former employer’s plan. This is the easiest option, since no action is required. The earnings on your assets will continue to grow tax deferred, and individuals between the ages of 55–59½ can take distributions without incurring the 10% early withdrawal penalty. However, investment choices are limited, you’re still dealing with your former employer’s rules, and in some cases, you may be charged higher fees than participants who are still working for the company.

To help with your decision, try our Rollover Assistant. This easy-to-use, online tool will ask you a few questions, and then provide a recommendation in minutes. If you do decide to move forward with rolling over into an IRA, just follow our Rollover IRA Checklist or call a Rollover Specialist at 1-877-921-2434 for step-by-step assistance. We’ll help you open an IRA, contact your former plan administrator, and put your retirement assets to work for you.

† Before deciding whether to retain assets in an old employer plan or roll over to an IRA, an investor should consider various factors including, but not limited to, investment option, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions, and possession of employer stock.  Please view the Investor Alerts section of the FINRA website for additional information.