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Should I Roll Over My 401(k)?

 

Should I Roll Over My 401(k)?

Thinking of rolling over your employer‑sponsored retirement plan to a Merrill IRA?

If you have multiple retirement plans, consider all your choices. Each has different advantages and disadvantages in terms of investments, fees, withdrawal rules, required minimum distributions, taxes and protection from creditors.
In addition, consider the potential benefits of having all your assets together at one firm. Having a single view of your investments can give you greater control over your financial life. As you weigh the pros and cons of each approach, use this chart below to help you understand the one that best aligns with your retirement goals. Learn more about Merrill IRAs.
1. Understanding your choices 401(k)
  Pros Cons
401(k) Leave the assets in your former employer's plan
  • Access to familiar investment choices
  • Likely lower costs
  • Broad protection from creditor claims under federal law
  • Preserve tax-deferred growth potential
  • If between 55 and 59½, may be able to take early withdrawals free of the 10% additional tax
  • Investment choices may be limited
  • Plan rules on distributions and beneficiary distribution choices may be restrictive
  • Can't make new contributions or take loans
  • The Required Minimum Distribution (RMD) rule applies if assets are left in a former employer's planFootnote 2
  Pros Cons
Withdraw the assets in a lump-sum distributionFootnote 3
  • Immediate access to the assets
  • Choose how you spend or reinvest the assets
  • Taxes will reduce the amount you receiveFootnote 4
  • Cannot put assets back into former employer's plan
  • Less opportunity for potential tax-deferred future growth
  Pros Cons
Roll over all or a portion of the assets to a traditional IRA
  • Potential for future tax-deferred growth
  • Can make new contributions to rollover IRAFootnote 5
  • Typically more investment choices and planning tools
  • Access to investment advice
  • Limited opportunity for early withdrawals without paying a 10% early-withdrawal additional tax (early tax is not due for amounts rolled over)
  • Loans are not available
  • Protection from creditors in bankruptcy only
  • Additional fees should be considered when moving assets to an IRA (for example, transfer fees may apply)
Move the assets to your new employer's retirement plan
  • Access to potentially new investment choices
  • Avoid immediate taxes and a potential 10% early-withdrawal additional tax
  • Broad protection from creditor claims under federal law
  • Preserve tax-deferred growth potential
  • May not have to take Required Minimum Distributions if you are still workingFootnote 2
  • May be able to take a loanFootnote 6
  • Some plans don't allow rolloversFootnote 6
  • There may be waiting periods or other restrictionsFootnote 6
  • Investment choices may be limited
Convert all or a portion of the assets to a Roth IRA
  • Withdrawals of contributions are federal income tax-free (taxes are paid at time of contribution)
  • Qualified withdrawals of any earningsFootnote 7
  • Able to pass potential earnings to heirs federal income tax-freeFootnote 8
  • Original account owner doesn't have to take Required Minimum Distributions (RMDs)Footnote 8
  • Potential hedge against rising taxes
  • Income taxes paid when you convert the assets
  • Loans are not available
  • Limited opportunity for early withdrawals
  • Protection from creditors in bankruptcy only
  • Additional fees should be considered when moving assets to an IRA (for example, transfer fees may apply)
2. Decide which choice works for you
Everyone's situation is different. There are many factors that you'll want to take into consideration when evaluating your choices and deciding which one, or combination of choices, is appropriate for you. Each choice may offer different investments and services, fees and expenses, withdrawal choices, required minimum distributions, tax treatment, and provide different protection from creditors and legal judgments.

These are complex choices and should be considered with care.
3. You have choices
As with all investment decisions, there are potential benefits and disadvantages for each choice, including those outlined on this educational overview. Also, keep in mind that in some situations, your choice is irreversible.

The information we are providing is educational in nature. We are not recommending a specific choice relating to your employer-sponsored plan assets.

Review the pros and cons of the choices for assets in your employer-sponsored plan (PDF)

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Footnote asterisk 
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Footnote 1 Some rollover choices may not be available with respect to Roth employer plan assets.

Footnote 2 Effective 1/1/2020, in accordance with new legislation, the required beginning date for RMDs is age 72. You may defer your first RMD until April 1st in the year after you turn age 72, but then you'd be required to take two distributions in that year. Failure to take all or part of an RMD results in a 50% additional tax applicable to the amount of the RMD not withdrawn. In addition, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, all 2020 RMDs have been waived, There are no coronavirus eligibility requirements associated with this change. 2020 distributions that would have been RMD payments prior to the law change may be restored to a plan or IRA subject to the 60-day rollover rule and the one-rollover-per-year limitation. Consult your tax advisor for more information on your personal circumstances.

Footnote 3 If any portion of your employer plan account balance is eligible to be rolled over and you do not elect to make a direct rollover (a payment of the amount of your employer plan benefit directly to an IRA), the plan is required by law to withhold 20% of the taxable amount. This amount is sent to the Internal Revenue Service as federal income tax withholding. State tax withholding and a 10% early-withdrawal additional tax also may apply. If you timely complete an indirect rollover, you can work with your tax advisor to obtain a refund from the IRS when you file your tax return for the taxable year.

Footnote 4 Distribution subject to immediate 20% federal tax withholding, plus applicable state tax and possibly a 10% early-withdrawal additional tax if you are under age 59½ or under age 55 and separated from service. You may owe additional taxes when you file your income tax return with the IRS.

Footnote 5 If eligible.

Footnote 6 Contingent on specific plan rules.

Footnote 7 Distributions from a Roth IRA are not subject to federal income tax, provided you have satisfied a five-year holding period and at least one of the following applies: (i) you are 59½ or older; (ii) you are a qualified first-time home buyer (lifetime limit of $10,000); (iii) you are disabled; or (iv) the distribution is a payment after your death to your beneficiary or estate.

Footnote 8 Original Roth IRA account owners are exempt from taking Required Minimum Distributions (RMDs). Beneficiaries are required to take RMDs from inherited IRAs. A spouse beneficiary may elect to treat an inherited Roth IRA as his or her own and would not have an RMD requirement during his or her lifetime.

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Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (PDF).

Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as "MLPF&S" or "Merrill") makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation ("BofA Corp."). MLPF&S is a registered broker-dealer, registered investment adviser, Member Securities Investor Protection (SIPC) popup and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp").
Merrill Lynch Life Agency Inc. (MLLA) is a licensed insurance agency and wholly owned subsidiary of BofA Corp.

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