Retirement Switch: From 401(k) to IRA

First off, let me explain that just such a move is allowed by many 401(k) plans through what is known as an "in-service rollover." Even though L.L.'s husband remains employed by the sponsor of his 401(k) plan, many plans allow employees who have reached age 59½ to remove all or a portion of their assets from a 401(k) plan. They can either do an outright withdrawal and pay the tax, or as is under consideration here, roll over the assets into an IRA.

Be aware, L.L., that your husband will need to check the details of his particular 401(k) plan to see if such a move is allowed. IRS regulations allow employers to offer in-service rollovers, but they do not mandate they be offered. It could be allowed outright, allowed under limited circumstances or not allowed at all.

The advantages of rolling over 401(k) funds into an IRA can include lower fund expenses, better investment selection and diversification away from a 401(k) plan heavy on company stock.

Tax Consequences for IRA Switch?

But there can be some disadvantages as well. These include the loss of a 401(k) loan option and, in some states, reduced creditor protection against lawsuits and bankruptcy.

Also, if you are moving company stock out of a 401(k) plan, be careful to review a tax benefit known as "net unrealized appreciation" or NUA. If the company stock has risen in value considerably, you want to be sure you handle this move correctly to reap big tax savings.

If a financial adviser is encouraging you to roll over 401(k) funds into an IRA, be aware of his or her motive. If the advisor is going to manage those assets for you, then he or she has the potential to earn higher fees than if the assets remained in the 401(k).

There may be a sound reason to transfer assets to an IRA; just keep in mind the adviser's interests.

Finally, L.L., I would urge you to think about why you want to move the money to an IRA.

If you think holding the money in an IRA as opposed to a 401(k) will protect you against market downturns, think again. The level of risk in your husband's portfolio hinges on investments he owns, not the type of account.

IRAs and 401(k) plans are merely holding bins. It's what you store in those bins that dictate your investment risk.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at

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