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In Your 50s? Decide On 401(k) Rollover

HUNT VALLEY, Md. (TheStreet) -- To roll or not to roll -- that is the question. When you leave a company, you have the following options facing you:

  • If the plan allows, you may be able to leave your 401(k) in the existing plan.
  • You may transfer cash from the existing 401(k) directly to your new 401(k).
  • You can conduct a direct rollover from the 401(k) to an IRA.

Only the owner of a 401(k) who has reached the age of 55 and parted service from the company running the 401(k) may take withdrawals with no penalty.

The financial services world has long relied on old 401(k)s (most of which an adviser cannot manage or receive fees or commissions from) rolling into IRAs (they can manage) as a steady stream of business as prospects and clients move from one job to another. While a direct rollover may be the best move for most people, there are a few reasons why someone may want to consider the first or second options.

First, while an IRA requires that an owner reach the age of 59.5 before taking distributions without a penalty, the owner of a 401(k) who has reached the age of 55 and parted service from the company may take withdrawals with no penalty. So if you're leaving your company between age 55 and 59.5 and would like to retire, it may be in your best interest to keep your 401(k) where it is.

Second, 401(k)s are thought to be safer from creditors than IRAs. IRAs are protected on a state-by-state basis, but 401(k)s offer a federal level of creditor protection, so a person in a particularly visible position professionally or in the community may find that additional protection comforting.

Finally, you may take a loan from a 401(k), while you may not from an IRA. Taking a loan from your 401(k) is not ordinarily advisable, but for some it could be necessary; you can't take a loan from a 401(k) without working for the company sponsoring the plan, though, so you'll need to transfer the old 401(k) balance into your new 401(k) to have the chance to.

These contingencies will not apply to the majority of workers who will benefit from the strengths offered in completing a direct rollover to an IRA. First, it is a benefit to be able to consolidate old 401(k) and other corporate retirement plans in one place. Oftentimes, workers leave a trail of old 401(k)s following their professional path. These older plans have a tendency to be forgotten and mismanaged.

In addition, 401(k)s have a limited number of investment options; it could be argued that to keep plan fiduciaries out of legal hot water, 401(k) plans are designed for mediocrity. While your 401(k) may have five to 50 (occasionally more) different options, the virtual investment universe is open to you in your IRA. This is the primary reason an old 401(k) is typically best rolled into an IRA. Many plans even allow workers over the age of 59.5 to conduct in-service direct rollovers. While most must wait to conduct a direct rollover until they part service with a company, the IRS -- and many company plans -- allow a worker to periodically roll out their balance in their existing company 401(k) once they pass the age of 59.5.

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Tim Maurer, CFP, is vice president of Financial Consulate, based in Hunt Valley, Md., and a member of NAPFA, the National Association of Personal Financial Advisors. He can also be found at TimMaurer.com.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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