Advantages and Disadvantages of Rollovers
Discover the advantages and disadvantages of retirement account rollovers below. Understanding the pros and cons of this financial option is essential for taxpayers.
If you are unsure what is most beneficial to you from a tax liability standpoint, consult with a local tax expert before making any decisions.
Advantages
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They postpone the payment of tax until the funds are withdrawn from the new plan;
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They provide a taxpayer with the opportunity of being in a lower tax bracket when the funds are withdrawn from the rollover account;
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Funds can continue to accumulate in the new plan on a tax-deferred basis.
Disadvantages
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Amounts can’t generally be withdrawn prior to age 59-1/2 without penalty;
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Just the opposite of Advantage (2), the taxpayer runs the risk that Congress will increase the tax rates in the future for the year(s) when funds are withdrawn.
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If the rollover was into an IRA (or a qualified plan that received a post-2001 rollover from an IRA, Sec. 457 or 403(b) plan), withdrawals are ordinary income and don’t get any benefit of 10-year averaging.