Examining Your Old Retirement Account Options

If you have a 401(k) with a former employer, you have several options on how to invest those assets.

Option 1 – Roll the funds into a Traditional IRA (or Rollover IRA)

Pros

  • You could have more investment choices available
  • You could find lower-cost investment options
  • Consolidating may make it easier to manage your savings
  • Potential for contributions and assets to grow tax-deferred

Cons

  • You cannot borrow against an IRA, as you might be able to do with a 401(k)
  • Your old plan may have products, services, or special pricing that may not be available outside of the plan

Option 2 – Roll the funds into a Roth IRA

Pros

  • You could have more investment choices available
  • You could find lower-cost investment options
  • Consolidating may make it easier to manage your savings
  • Potential for Federal tax-free growth and withdraws*
  • Exempt from mandatory withdraws

Cons

  • You cannot borrow against an IRA, as you might be able to do with a 401(k)
  • Your old plan may have products, services, or special pricing that may not be available outside of the plan
  • If you want to roll over from a traditional 401(k) to a Roth IRA, you would have to pay appropriate taxes

Option 3 – Roll over assets into an existing 401(k) plan offered by your present employer

Pros

  • You might have more attractive investment options or services
  • You might be able to borrow against your new 401(k) assets

Cons

  • You might have limited investment options
  • Your new plan might not allow such transfers
  • Your old plan may have products, services, or special pricing that may not be available outside of the plan

Option 4 – Keep your funds in the old 401(k)

Pros

  • You might be able to borrow against your 401(k) assets
  • Your old plan may have products, services, or special pricing that may not be available outside of the plan
  • Potential for penalty-free withdraws**

Cons

  • You might have limited investment options
  • If you have other old 401(k) accounts, you might find it difficult keeping track of them
  • You may not be able to make additional contributions to the account
  • Some employers might charge higher fees if you are not an active employee

Option 5 – Cash out your 401(k) account

Pros

  • You would have access to the funds if you have a financial emergency

Cons

  • You could have to pay taxes and penalties, depending on your age***
  • Potential lost opportunity of continued growth in a tax deferred account

IRAs and employer 401(k) plans have investment or account related fees and expenses. Consider all applicable fees and features prior to rolling over retirement plan assets to a Scottrade IRA. There may be costs associated with the investments in the IRA account such as loads, expenses or brokerage commissions. Fees for optional services may also apply. Click here for a full explanation of our fees.

* A distribution from a Roth IRA is tax free and penalty free, provided the five year aging requirement has been satisfied and one of the following conditions is met: 59½, disability, qualified educational or first home purchase, or death.

** If you are at least 55 years old when you leave your job, you may be eligible to take penalty-free withdraws, although ordinary income tax would apply.

*** An early withdrawal may incur a 10 percent penalty, if you're under age 59½. In addition, you may owe federal and possible state income tax including an immediate 20% federal income tax withholding.

This material is for informational purposes only and Scottrade is not responsible for any errors or omissions. The information is subject to change without notice and should not be construed as a recommendation or investment advice. The value of investments may fluctuate and securities, when sold, may be worth more or less than their original cost. In general, plan assets have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. State laws vary in the protection of IRA assets. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.

Guidance provided by Scottrade is educational in nature, is not individualized, and is not intended to serve as the primary or sole basis for your investment or tax planning decisions.

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