A. In our previous blog posts, we have summarized the pros and cons of rolling 401k from previous job to IRA. Now we will discuss a few major tax advantages of not rolling over 401k to IRA after leaving a job.
Avoid the 10% Tax Penalty For Early Withdrawals
If you are between age 55 and age 59 ½, it's probably a good idea to leave 401(k) as is, because once you have reached age 55 and need to withdraw funds from the 401(k), you can do so without the 10% penalty for early withdrawals. However, if you rolled over the 401(k) funds to an IRA, then a 10% penalty tax would apply to any withdrawals before you reaching age 59 ½.
Avoid the Required Minimum Distributions after age 70 ½
If you plan to work past the age when distributions become mandatory (age 70 ½), you can avoid the required minimum distributions (RMDs) by leaving the funds in the employer-sponsored 401(k), because as long as you continues to work, you can avoid taking distributions from a 401(k), therefore avoiding the associated income tax liability that those distributions generate. However, if you rolled over to IRA, you are required to take RMD once reaching age 70 ½, regardless you are still working or not.
Avoid Income Tax on Company Stocks Held in 401(k)
If you hold company stocks within the 401(k) plan, you may qualify for favorable tax treatment if the stock is left in the 401(k), because upon distribution from the 401(k), the sale may qualify for taxation at your long-term capital gains tax rate, rather than the ordinary income tax rate that would apply to the appreciation on the stock if it was rolled into the IRA and later sold.
In short, whether to rollover 401(k) from previous job to IRA depends on your unique situation.