When you leave your job there are many considerations, but a big one is whether to roll your employer sponsored retirement plan to an IRA or Roth IRA. 

An employer sponsored retirement plan includes a 401(k), 403(b), TSP, SIMPLE IRA, cash balance pension plan, etc. 

Depending on the investments in your plan, and other factors, it often makes sense to roll over your employer sponsored retirement account to an IRA after you leave your employment. 

Reasons to roll to an IRA include: 

• More investment options 

• Possibly lower cost investment options 

• More control of your money 

• Allows your advisor to make asset location decisions, which can result in a more tax-efficient overall portfolio 

• Allows for opportunistic rebalancing  

• If left in the 401(k), you will be responsible for taking a separate RMD from each account. RMDs for IRAs can be aggregated and taken from any IRA account 

• Fewer accounts to keep track of 

• Easier to make Roth conversions 

• You are over age 70 ½ and want to give to charity from your IRA (known as "qualified charitable distributions" and only available to IRAs) 

However, the rules surrounding 401(k)s and IRAs are different and should not be overlooked when making this decision.  

One big factor to review when deciding to rollover or not depends on your age. For an IRA if you're under age 59.5 and you withdraw money from the account, you will owe regular income taxes on it along with an additional 10% early withdrawal penalty. However, if you leave your job after age 55, you can withdraw money from an employer plan penalty free. You will still owe taxes on money withdrawn, but the 10% penalty does not apply after that age.  

If you suddenly find yourself out of a job without access to a brokerage account, there is a possibility that you might need to use retirement account money for living expenses. If you are over age 55, but not yet 59.5, it almost always makes sense to keep your money in the old 401(k), at least temporarily, to reduce the tax impact of a withdrawal if you did need one.  

Other reasons to not roll over your 401(k) include: 

1. If you are a minister (because minister pension plans can qualify as nontaxable housing allowance) 
2. If you have an outstanding loan (this will be considered a taxable withdrawal when rollover the account, subject to penalties if you are younger than age 59 ½) 
3. If you own a significant portion of employer stock in the plan (you can roll this directly to a brokerage account and be taxed only on the cost basis; penalties apply to the cost basis amount if you are younger than age 59 ½. (This is known as a "net unrealized appreciation" transaction) 
4. If you have unvested employer contributions 
5. If you are planning to convert most of the balance to an annuity 
6. You wish to make back door Roth IRA contributions each year  
7. If you have liability protection concerns beyond that offered to IRAs based on your state of residence. IRAs are held to state creditor laws regarding malpractice, divorce or other lawsuits; their maximum caps can be lower than ERISA protections which cover employer plans.
   1. IRA Creditor Protection by State & Lawsuit Exemptions for Rollover (assetprotectionplanners.com)
   2. Are Your Retirement Accounts Protected from Creditors? | Ed Slott and Company, LLC (irahelp.com)
   3. IRAs in both MA and NH have unlimited creditor protection, subject to certain restrictions outlined in the links above 

If none of the above apply to you, you are likely better off by rolling the money into your IRA or Roth IRA (if your plan has Roth or after-tax contributions). This consolidates your assets, making them easier to manage, especially when it comes to tax-efficient asset location decisions, making partial Roth conversions, taking RMDs, making QCDs, rebalancing opportunistically, and managing your beneficiaries. 

Stay informed of any changes that may affect your financial life by working with a financial advisor. Deciding whether to rollover your employer sponsored retirement account can be complicated. You don't have to do it alone. If you need assistance with rolling over your 401(k), 403(b), TSP or 457 plan as part of your overall financial planning, please reach out to our team.