Creditor protection

Plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), including 401(k)s, have federal protection from creditors. IRAs are not ERISA plans, but as retirement savings, IRA assets are protected if you file for bankruptcy. It is important to know, though, that depending on your state and the local laws, IRAs may not be protected from all creditors. If you need federal protection, you should probably leave your savings in an ERISA plan rather than moving the assets to an IRA.

Qualified account access in your 50s

Qualified dollars, or money that qualifies for special tax treatment (tax-deferred assets held, for example, in an IRA or 401(k) or tax-free growth, through a Roth account) is subject to penalty for early withdrawal. Money held in a 401(k) can be withdrawn without penalty after age 55 in some cases, if the investor meets early withdrawal exceptions such as separation of service. Distributions from an IRA are penalized for an additional four and a half years until the account owner reaches age 59½. If, for some reason, you believe you will need to access your retirement savings after you turn age 55 but before you turn age 59½, leaving your assets in a 401(k) is probably a better bet.

Compare fees

Generally speaking, leaving your 401(k) with your former employer or transferring it to your new employer, if that’s an option, may be less expensive, when you consider fees and expenses, than if you roll the account into an IRA. That said, since investment choices in an IRA are usually more expansive, you can often find investment options that are less than a 401(k) plan. For example, you can probably invest in low-cost index funds, or ETFs in an IRA. It is important to compare the fees and expenses associated with your specific 401(k) vs. your IRA. You should also compare the available investments in each plan, which can be both time-consuming and complex, but it’s the only way to determine which option will work the best for you, your comfort level and your unique situation.

Investment options

Typically, unless you have and use a self-directed brokerage option, there will be fewer investments to choose from within a 401(k) compared to an IRA. On average, there are 25 investment options in a 401(k) plan vs. thousands available in an IRA.

Advice or not?

If you need or want investment advice, you’ll have some options. You could use the investment advisory services and/or managed accounts services through your 401(k) plan. Or, you could roll your 401(k) into an IRA and pay an adviser a fee for assets under management and/or commissions to buy and sell investments and/or insurance products. Of course, you’ll need to compare the cost of these options and determine which you prefer.

Are you invested in company stock?

If you decide to roll over your 401(k), you could lose the tax benefits of employer stock. To avoid this, consider distributing your employer’s stock into a taxable account. Following this strategy, you will pay ordinary income tax on the stock’s cost basis, not the market value. If or when you sell those shares, you would pay a long-term capital gains tax on what’s called the net unrealized appreciation, or “NUA.”

Outstanding loan?

Most of the time, if you have an outstanding loan from your 401(k) plan, it will come due within 90 days of you terminating employment. This will be spelled out in your plan documentation. If that’s the case, ask your employer if post-employment loan repayments are allowable.