9 Important Details about Early Retirement Plan Rollovers

Handwerk Consulting |

You’re probably aware that there are many options for retirement planning including 401(k)s, IRAs, Roth IRAs, and more. Employer-sponsored plans like 401(k), 403(b), and 457(b)s are some of the more popular options. These plans let employees save for retirement on a post-tax or tax-deferred basis, which is more common, and have higher contribution limits..

Nevertheless, as people change jobs or employers, they must judge what to do with their retirement accounts. For some people, early retirement plan rollovers are a wise decision. But before making any significant financial decisions, you should weigh the advantages and disadvantages to see if this tactic fits your entire economic strategy.


  1. Won’t have to pay taxes or penalties

    A rollover from an early retirement plan to an IRA is free of taxes and penalties. The majority of IRAs and employer-sponsored plans are tax-deferred funds. This means that you will only be subject to tax at standard rates after taking distributions rather than upon rollover.
    Therefore, there is no 10% penalty if you roll your 401(k) into an IRA. However, your 401(k) will be liable to these fines and taxes if you cash it out or convert it to a Roth IRA because Roth accounts are taxed at the time of contribution.

  2. Lower fees and wider investment options

    Compared to 401(k) plans, many IRAs offer a wider range of investing options. You can make investments in non-employer-sponsored schemes such as individual stocks, bonds, ETFs, options, and other products. Additionally, compared to some employer-sponsored plans, most IRA investments have lower fees.  Some 401(k)s, for instance, offer mutual funds with fee ratios higher than 1%. The difference between a 0.1 percent and a 1 percent spending ratio may not seem like much, but over the long run, it might cost you hundreds of thousands of dollars.

  3. Easier to manage

    It’s becoming rare to find employees that stay at a company for decades as the average job tenure is approximately 4 years. You or your advisor will be able to handle the money more easily if you roll over previous 401(k)s into a single IRA. Consolidating early retirement plan rollover funds will simplify keeping track of profits, costs, and other crucial information.

  4. Flexible withdrawal exceptions

    Besides the new CARES act penalty-free withdrawal rules, IRAs and Roth IRAs have special exceptions for penalty-free withdrawals. Currently, you can withdraw up to $10,000 from either of these accounts for higher education costs or a down payment for a first time home purchase. You can apply this rule to each special case just once over your lifetime.
    Unpaid medical bills, health insurance payments while unemployed, and permanent incapacity are a few more exceptional situations that fall under the purview of this law.

  5. Being able to access robo advisors

    Robo advisors have changed investing as they can automate some aspects of portfolio management like asset allocation, tax-loss harvesting, and rebalancing. 

    This technology can perform these functions for a fraction of the cost compared to a portfolio manager’s fees. Usually, a Robo advisor charges 0.10% - 0.40% of assets under management (AUM), and the typical portfolio manager’s AUM fee is approximately 1%. Many IRA custodians like Charles Schwab and Fidelity have Robo advisors.


  1. Can make it harder to retire early or later

    The deadline for taking penalty-free withdrawals from 401(k)s is age 59.5. However, the Rule of 55 is unknown to the majority of people. According to this little-known regulation, you can withdraw from your current employer's retirement plan without being penalized once you age 55. To take penalty-free withdrawals if you roll over an early retirement plan, you must wait until you are 59.5 years old.

    Another important factor to consider is the required minimum distributions or RMDs. This rule requires you to take a distribution from your IRAs and 401(k)s once you turn 72. If you plan on working into your 70s, consider keeping money in your employer’s 401(k). Funds in your current employer’s 401(k) will not be subject to RMDs, unlike those in IRAs.

  2. Less protection from lawsuits and creditors

    401(k)s offer more protection from lawsuits and creditors under the Employee Retirement Income Security Act of 1974 or ERISA act. If you someone wins a judgment against you in a lawsuit, then your 401(k) funds are protected. IRA funds don’t offer the same legal protection and IRA protections can vary per state.

    Employer-sponsored retirement accounts are also protected from bankruptcy. IRAs balances are protected up to roughly $1,200,000 which is adjusted for inflation annually. 

  3. Can’t borrow from IRAs

    Although it's not advisable, you can borrow from your 401(k) or 403(b) up to the lesser of $50,000 or 50% of your vested account amount (b). When things are tough, loans could be helpful as a last resort. You must return these monies with interest to avoid fines and ordinary income taxes. You would also lose out on possible market gains by taking a loan from your retirement plan.

    IRAs have some flexibility with penalty-free distributions, but you can’t borrow against them as you could with employer-sponsored plans.

  4. Higher taxes on company stock and NUA

    If you have a substantial company stock position in a 401(k), think twice before doing an early retirement plan rollover to an IRA. Rolling over company stock could lead to higher income taxes on the NUA. The NUA is simply the difference between the original price (i.e. cost basis) of the company stock when you received it and its current value when rolled over.
    When corporate stock is transferred to an IRA, taxes are not due. But when you sell it, you'll have to pay higher standard rates. If you transfer the stock to a brokerage account, your cost basis would be subject to higher regular rates. Thankfully, you would only incur lesser capital gains taxes if you decided to sell the shares.

There are many tools that you can use to save for retirement, but employer-sponsored plans like 401(k)s and 403(b)s are some of the more standard options. It’s important to understand how they will fit into your long-term plan before deciding to perform a rollover.

Unsure of your options with early retirement plan rollovers? Schedule a free consultation with one of our financial professionals today!

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.