Should You Stay or Should You Go?

If you’re changing jobs or getting ready to retire, you may be considering an IRA rollover – which means transferring funds from a qualified retirement plan, like a 401(k) or 403(b) account, to an IRA. But before you move your stash, be sure to do your homework.

While tax-qualified plans and IRAs are both retirement-savings tools, they’re different financial vehicles with individual rules. If you’re thinking about a rollover, you’ll want to weigh the benefits and drawbacks of each option in the context of your specific situation.

Reasons to Roll Over

An IRA rollover is a great way to consolidate your funds in one location – and it could give you investment flexibility with potentially fewer penalties. Here are some things to list in the "pro" column if you’re considering making a move:

• More investment options: An IRA could give you access to a broader array of investments than a 401(k) – including solutions that could help you reach your retirement goals.

• Penalty-free withdrawals: You can take assets out of an IRA before age 59½ without penalty (although the distribution is still taxable) to covers costs for:

o College education. Withdraw money from your IRA to pay for certain educational expenses, including college for your kids or grandkids.

o First-time home purchase. Tap your IRA for up to $10,000 in funds to build a down payment for a home for yourself, your spouse or your child. A first-time home buyer is defined as someone who has not owned a home for two years prior to purchase.

o Health insurance. Use your IRA to pay for health insurance premiums if you haven’t held a job for at least 12 weeks.

• Estate benefits: While most 401(k) plans require heirs to take immediate possession of assets after the policyholder passes away, an IRA could allow them to take tax-deferred distributions over their lifetimes.

Reasons to Stick With Your Plan

On the "con" side of your rollover-readiness list, you’ll want to include the options you may have to give up if you convert your qualified plan to an IRA. Here are a few:

• Borrowing power: If you need cash, you may be able to take out a loan against funds in your qualified plan (check your policy for details); IRAs don’t offer this feature.

• Protection against lawsuits: While both IRAs and qualified plans offer some safeguards against creditor claims and bankruptcy, qualified funds generally have greater protection from

creditors.

• Flexibility in divorce settlements: Both types of retirement plans can be split during a divorce, but qualified plans offer more flexible distributions. Unlike IRAs, they allow the receiving spouse to access funds before age 59½ without incurring a penalty.

• Early penalty-free access: If you retire or leave your job after age 55, you can access funds from a qualified plan at an earlier age than you can with IRA funds. Between the ages of 55 and 59½, you’ll pay a 10 percent penalty to withdraw money from your IRA, but you can tap into your qualified plan without paying any extra fees.

There are many factors to consider when deciding if a rollover is the right decision for you. A financial professional can help you weigh the options and choose a course that matches your specific goals and needs. You should consult your tax advisor to understand any tax implications.

This publication is not intended as legal or tax advice. Financial representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor. 

Article prepared by Northwestern Mutual with the cooperation of Ben Beshear. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM) (life and disability insurance, annuities and life insurance with long-term care benefits), Milwaukee, Wisconsin, and its subsidiaries. Securities are offered through Northwestern Mutual Investment Services, LLC (NMIS), a subsidiary of NM, broker-dealer, registered investment adviser, member of FINRA and SIPC. Ben Beshear is an agent of NM and registered representative of the NMIS based in Cincinnati, OH. To contact Ben Beshear, please call 513.366.3664, email him at ben.beshear@nm.com or visit his Web site at benbeshear.com.