Should you roll your 401(k) into an IRA if you retire before 59½?

It depends on your age when you leave

When you retire, rolling your 401(k) into an IRA is the usual next step, and for a lot of people it makes sense. But if you’re retiring before 59½, how old you are when you leave your job can change the answer.

If you take money out of a retirement account before 59½, you usually pay a 10% penalty plus the tax. For someone who retires early and plans to live on that money for a few years, the penalty can add up quickly.

The 401(k) rule an IRA doesn’t have

A 401(k) has a special rule. If you leave your job in the year you turn 55 or later, you can take money out of that job’s 401(k) with no 10% penalty, as long as the plan allows it. You still owe income tax on what you take out, but the penalty doesn’t apply.

An IRA doesn’t have this rule. Once the money is in an IRA, the penalty is back until 59½. That means rolling everything over without thinking about it can close a door you might need in the next few years.

What to do before you sign the paperwork

If you left your job at 55 or older and you’ll need some of the money before 59½, it can make sense to leave that part in the 401(k) and move the rest to an IRA. Before you decide:

• Estimate how much you’ll need to take out before you turn 59½.
• Check what your 401(k) plan allows for withdrawals after you leave.
• Decide how much to keep in the 401(k) and how much to roll over.

The rollover paperwork is easy to sign. Getting the split right first is what keeps the penalty off the table.

How we handle it

At Sansone CPA & Financial, we coordinate your tax, investment, and retirement decisions so the order you move and spend your accounts fits the years before 59½. That starts with retirement income planning in Crystal Lake, IL built around your tax return.