Rethinking 401(k) Rollovers

Weigh taking a loan. Raiding your retirement stash early to cover current expenses is never a good idea. But if your back is up against the wall financially, you can generally take loans only from a 401(k) and not from an IRA. "If you roll it over to an IRA, the only way you can get access is to pay taxes and the penalty," Dimitriou says.

Estimate your retirement age. With an IRA, there is a 10 percent penalty if you make a withdrawal before age 59½. But retirees can begin taking penalty-free 401(k) withdrawals at age 55. "If you're 56 and think you might need access to a 401(k), you may not want to move it," Burkemper says.

At age 70½, retirees must take required minimum distributions from their retirement accounts. There's one exception: If you're still working, you don't have to take the distribution from a 401(k)—and pay the extra taxes that year—unless you own more than 5 percent of the company.

Review estate planning. Most 401(k) plans will force your heirs to take the assets soon after you die, which can be a big tax burden on your loved ones. Some 401(k) plans allow only spouses to roll inherited 401(k) dollars into an IRA. "If you're going to stay in the plan, you better make sure it allows you to do a nonspousal rollover into an IRA," cautions Burkemper. IRAs typically give retirees more freedom to allow heirs to take required minimum distributions instead of a lump sum and make it easier to set up multiple beneficiaries. If your employer's 401(k) plan doesn't make it easy for your heirs to space out the tax payments, you might want to roll over the money into an IRA.