401(k) versus IRA: three factors to consider when you retire

Options and tax implications for 401(k)s and IRAs

During your career, you may have worked for a few different companies, which means that you could have more than one retirement account. Keeping track of your statements, balances, and investments can be overwhelming. It might make sense to consider combining your accounts so it’s easier to manage your money. But you’ll need to know the rules before deciding which account to add the others to. 

With a 401(k), you have options when you retire:

• Keep your money in your 401(k)—If you’re happy with how your account is doing and the fees are reasonable, you may decide to leave your money right where it is. Or, if you’re still working and about to retire, you could consolidate other 401(k) accounts with your current employer’s plan. Moving money directly from one 401(k) account to another is generally not taxed, and you can keep building your retirement savings without paying taxes until you make a withdrawal.¹
• Move your 401(k) balance(s) into an IRA—Moving your 401(k) money into an IRA is a popular option. IRAs tend to offer investment options that aren’t available in 401(k) accounts. When you move your money directly from a 401(k) to an IRA through a rollover, you likely won’t be taxed. 
• Take a cash withdrawal—You may want to use some of your savings for a big purchase such as buying a second home. But you should think about your long-term goals, spending habits, and income because although you’re retired, you may want to give the money in your accounts more opportunity to grow. Remember that your savings need to last throughout your retirement years. And depending on the type of account you’re taking it from, you may owe taxes. 

Factors to consider when choosing between a 401(k) and an IRA

When it comes to deciding on a 401(k) or an IRA, there are three key factors for you to think about:

• Fees—Are there any fees? Sometimes retirement plans and IRAs charge for things such as recordkeeping and maintaining your account. Mutual funds may also have fees, especially if you don’t keep the shares for a certain amount of time. It’s important to understand what fees you may be charged, which can usually be found in the investment option’s prospectus and the plan’s 404a-5 participant fee disclosure document.
• Investments—What investments are available to you? It’s great to have a variety of choices available to help you balance your risk and find options at different costs. You can research specific investments by looking at the fund’s website to learn more. 
• Risk tolerance—When you’re close to retirement or retired, you may want to think about how much risk you’re willing to take. It might make sense to pick less risky investments so that your savings aren’t as affected by changes in the stock market. Look closely at the investment options in 401(k)s or IRAs to make sure you’re comfortable with the investment options that are available.

Benefits and drawbacks of combining your accounts into a 401(k) or IRA   

Deciding between 401(k)s and IRAs when you retire

You spent decades saving for retirement. Now that you’re getting ready to retire, it’s time to weigh the benefits and drawbacks of your options and figure out what to do with all your savings. Before making your final decision, you may want to consult with a licensed financial professional.

1 Ordinary income taxes are due on withdrawal. Withdrawals before the age of 59½ may be subject to an early distribution penalty of 10%.