When considering the options for a 401k or other retirement plan contributions or rollovers it is important to make sure you are informed and that is where a fiduciary fee-only financial advisor can help. Independent, fee-only wealth managers and certified financial planners are fiduciary advisors that are required to put your best interest first. This is important because there are many different types of “financial advisors” and when it comes to your retirement nest egg, you want to make the choices right the first time.

What are your 401k rollover or withdrawal options?

What is all the fuss about? The reason why your 401k rollover decision is important is because when executed well, it can set the foundation for a successful retirement plan. When poorly handled, it can result in unnecessary taxes, penalties and erode your ability to retire. This is understandable, as 401k plan documents can be confusing and getting ahold of your 401k plan’s service providers can be difficult. Many participants are surprised to find out of the enormous tax consequences of premature taxable withdrawals, only after the fact. Once a distribution is made it is final. 401ks and IRAs are unlike checking accounts, and do not allow for flexible withdrawals and deposits. The reason for this is that ERISA and the IRS enforce strict rules to prevent possible abuse of the income tax system and retirement plan discrimination. Here are your options with some high-level pros and cons:

1.Keep Your 401(k) With Your Former Employer

a.Your funds stay tax advantaged within your existing plan if permitted by your former employer and you retain the option to rollover the funds to an IRA at a later date

b.Investment options are limited to your former employer’s plan, fees are charged for investment management and 401k record keeping fees

c.If you leave your job between ages 55 and 59½, you may be able to take penalty-free withdrawals. Required minimum distributions (RMDs) may be delayed beyond age 72 if you’re still working.

2. Roll It into Your New Company’s 401(k) Plan

a.If permitted by your new employer, rolling over your former employer 401(k) retains the tax advantaged status of your funds and avoids penalties

b.This option might make sense for those that are comfortable continuing to invest on their own and are satisfied with the investment options and fees of the new plan

c.Important to review new investment and 401k recordkeeping fees as they can differ significantly from your previous plan

3. Roll Your Money Into an IRA

a.Funds directly rolled over into IRA’s retain their tax advantaged status and gain an array of investment options but will not have the ability to borrow against

b.Investors can tap financial advisors for these account types for advice on tax, investment, and estate planning.

c.Important to be aware of investing expenses and compare to 401k fees

4. Cash Out Your 401(k) Plan

a.This option can pose severe tax consequences, as the withdrawal amount is taxed as taxable income and subject to the 10% early withdrawal penalty for those below the age of 55

b.This option is rarely advisable and normally reserved as a last resort

Are there other plans available than 401k?

For those looking for alternatives to a 401(k), consider exploring the possibilities below.

Traditional and Roth IRAs

If your employer doesn’t offer a 401(k)—or you are self-employed or a small business owner—you can open an individual retirement account (IRA). These accounts also offer retirement-oriented tax advantages, which differ depending on whether you choose a traditional or Roth IRA.

Even better, you can save in one in addition to a 401(k), though—depending on your income and the type of account you choose—your contributions may not be tax-deductible. Even in that case, however, the money in your account will grow tax-free until retirement.

Although IRAs and 401(k)s offer tax benefits, there are some key differences. With an IRA, the most you can contribute in 2022 is $6,000 a year ($7,000 if you’re at least 50). For 2023, the limit increases to $6,500, or $7,500 if your age 50 or older.

In general, 401(k)s and IRAs have an early withdrawal penalty if you take distributions before age 59½, but there are exceptions to this rule.

With an IRA, the world is your investment oyster. You can invest in just about any security or financial instrument whose value can be measured precisely and daily.

Traditional vs. Roth IRAs

Like 401(k)s, IRAs come in both traditional and Roth versions. The choice between the two IRA accounts typically depends on whether you want to pay taxes now or later.

With a traditional IRA, you deduct the contributions from your taxes today, and you only pay income taxes when you start withdrawing decades down the road.

With a Roth IRA, you don’t get to deduct the contributions from your annual tax bill, but once you start withdrawing, it’s all tax-free. Any earnings or investment growth is tax-free, too. You are also spared the required minimum distributions when you hit age 72, which are mandated for traditional IRAs and 401(k)s.

When deciding between a traditional or Roth IRA, you do have to ask yourself if you’re going to be in a higher tax bracket once you retire and if the tax brackets in the future will bear any resemblance to your bracket today.


If you are self-employed or a small business owner, you may also have the option to open a simplified employee pension (SEP-IRA) if you qualify. SEP-IRAs operate much like traditional IRAs in terms of tax advantages and investment options. They have the additional benefit of higher contribution limits.

Contributions cannot exceed 25% of compensation for the year or $61,000 (for 2022) and $66,000 (for 2023), whichever is less.

Cash-Balance Defined-Benefit Plan

If you’re self-employed and successful but were too busy—or too low on cash—to do much about building up a retirement plan earlier in your life, there’s still time to do something to secure your future. A cash-balance defined-benefit plan will let you play instant retirement catch-up.
Many self-employed people find themselves later in life with a high income and very little to show for it in the way of retirement savings. One solution for such a person is a cash-balance defined-benefit plan, where the annual contribution in 2023 could potentially be as high as $265,000.

The Brokerage Account

Finally, there are regular old investment accounts. You can open an account at your preferred financial institution and “contribute” as much as you want or can. Any profit, whether from appreciation or dividends, will be taxed as long-term capital gains if the investments are held for more than one year. This likely means you’ll pay a lower rate than you’d pay on ordinary income.

While contributing to a 401(k) or traditional or Roth IRA has great benefits, like deferred taxes or tax-free growth, annual limits may prevent you from investing enough capital to enjoy a sufficient retirement income later. Supplementing a retirement account with a taxable account invested in an appropriate stock fund and bond fund allocation can supercharge your financial plan and support a desired outcome.

If you’re disciplined enough to ride out the inevitable lows and breathe deeply during the highs, a standard investment account might be the way to go. But they take a lot of effort to maintain, and you may owe capital gains on income growth

Why talk to a financial planner?

Choosing the best financial advisor that specializes in your specific situation for your 401k decision can greatly benefit your financial plan. Russell Investments estimates that a financial advisor or financial planner may add an estimated 4.91% in value per year. Discussing your 401k rollover options with a wealth advisor or financial planner can make a significant difference:

Value of an Advisor…

What is it like meeting with an advisor?

We’ll have a conversation about your options. Our first meeting is free of charge and carries no obligation. The introduction meeting’s purpose is to get to know you, your goals, and answer your questions about your 401k rollover and retirement planning. We’ll discuss your options, share our approach, and explore if we’d be a good fit for your wealth management. We’re fee-only fiduciary advisors, so we do not pitch products or rely upon high intensity sales tactics to make commissions.

Questions and factors we’d discuss:

  • Are you retiring soon? You may need to work longer to achieve a comfortable retirement, or you may already be there, getting your financial life in order helps you see where you stand.
  • Do you have dependents? Do you need to provide income for someone else should something happen to you or have you saved enough to provide a legacy for your family or a charity.
    Making sure your investments match your goals is key to a successful retirement.
  • How do you feel about your investments? Do your emotions make you sell when the markets down and buy when its high or do you have far much risk than you need to accomplish your goals. Can you sleep at night or are you up worried about what will happen to your investments. We can help make sure that your retirement is protected as well as ensuring you have growth for the future.
  • Are you staying up to date on your investments and tax issues? If you become sick who will manage your money? Letting a group of professionals manage
  • How does your 401k fit within your income tax plan? Staying up to date with tax law and implementing strategies to avoid higher taxes become very important after you retire. How are you going to take income and from which accounts to minimize taxes, this is where using a professional can really add value.
  • Cost benefit analysis of your current 401k, new 401k, and IRA options- Does your workplace retirement account have high fees compared to other options or is an insurance company making more off your hard work than you? Looking at the costs you pay vs the value you receive can sometimes be farther apart than you think.
  • Is your estate plan up to date? The best financial advisors are well versed in all the options available to make sure the ones you love are taken care of if something happens to you. Though you may need an attorney to assist with a will or trust, a good advisor should be able to spot when you may need a particular legal instrument.
  • Do you need Insurance, or a policy evaluated? How much life insurance do you need, if any. Is that annuity you purchased costing you 5% while you make 3%. At Davis Capital Management, none of our advisors are allowed to have an insurance license which removes our bias when it comes to evaluating your needs for risk management.

What is a Fiduciary Financial Advisor?

Fiduciary advisors are required to act in your best interest. What does acting in your best interest mean in practice? For example, it means that if there are two suitable options for a particular investment recommendation, we are required to probe for information, weigh the pros and cons of both options given your specific situation. We then recommend the option that puts your best interest first, not the option that enriches the firm or advisor. We’re able to do this because of our independent, fee-only fee structure. We are not affected by bias that commissions might place on a particular decision. In doing so, we avoid potential conflicts of interest. All of our advisors have first-hand experience in working with large financial institutions that conducted business very differently. This is what led to the creation of Davis Capital Management. Simply put, we do not allow for commissions or bias to affect investment or planning decisions and believe it results be superior outcomes for investors.

Contact us today

Your 401k rollover decision is important to your retirement plan. Aligning yourself with the best financial advisor can have a significant impact on your retirement plan and set you and your family up for a successful retirement.

Get Your Free Assessment

Fill out the form below to speak with a Certified Financial PlannerTM
Professional on our team.
Your information is secure.