Wealth Management Group Newsletter – Fall 2023
Peggy Vyborny, Colin O’Neill

What to Do With Your 401(K) Account When You Leave a Job


If you are leaving your job — because, for example, you are changing employers or retiring — you may need to decide what to do with your 401(k) account without triggering a taxable withdrawal. Unless your account balance is less than $5,000 (excluding rollovers from other accounts), you typically can keep the funds in your former employer’s plan. You also may have the option to roll over your old 401(k) balance into your new employer’s plan. Finally, you can roll over the funds into an IRA account.

Stay or roll over?

Rolling over a 401(k) balance into an IRA can be appealing because IRAs — usually offered by financial services companies — can provide a greater variety of investment options. However, there are also drawbacks to such rollovers.

Before making your decision, weigh the following factors:

Investment fees vary widely, and they can have a big impact on the performance of your retirement funds. Unfortunately, they are easy to overlook because they come out of your returns. Leaving your job may give you an opportunity to move your savings into lower cost investments. On the other hand, some 401(k) plans offer competitive fees, so be sure to compare the costs of your various options.

Related Read: 401(K) Plan Early Access: How to Avoid Penalties

Your Age
If you are 55 or older but younger than 59½, there may be an advantage to leaving funds in your former employer’s 401(k) plan. Usually, if you withdraw money from a 401(k) or IRA before age 59½, you are subject to a 10% penalty (on top of ordinary taxes for withdrawals). However, a special rule allows you to withdraw money from a 401(k) plan penalty-free before age 59½ if you leave your job at age 55 or older (50 or older for certain public safety employees). If you roll over the funds into an IRA, this option is lost.

Protection From Creditors
If you are concerned about creditors going after your retirement savings, you will generally enjoy greater protection if you leave your funds in a 401(k) plan. Under federal law, money in 401(k) plans and other qualified retirement plans is generally protected from creditors, both in and outside of bankruptcy. Funds rolled over from a 401(k) into an IRA are generally protected in bankruptcy. Outside of bankruptcy, however, creditor protection for IRAs is governed by state law, and the level of protection varies widely from state to state.

Company Stock
If your traditional 401(k) plan invests in your former employer’s stock, you may miss out on a valuable tax planning opportunity by moving your entire balance to an IRA. If you leave company stock in the current plan, you likely can take advantage of a technique under which the stock is distributed to a taxable account and you are taxed at favorable capital gains rates on its appreciation. However, if you roll over your entire balance into a traditional IRA, future distributions will be taxed at ordinary income rates — which may be significantly higher.

Withdrawal Flexibility
If you are looking for control over the timing of your withdrawals, you may want to roll over your balance into an IRA. Many 401(k) plans prohibit partial or periodic withdrawals, so if you plan to spread withdrawals over time, a rollover can be your best bet.

No pressure

After you have left a job, there is generally no need to make a quick decision about an existing 401(k) balance. The best course is to leave your savings in your former employer’s plan and take time to review your circumstances and discuss all of your options with your financial advisor.

For more information, contact Peggy Vyborny at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Tax planning: Investors vs. Traders


An investor in securities trades only for their own account and they do not carry on a trade or business related to those securities.

A trader in securities engages in many transactions on a regular basis.  The distinction between a trader and an investor is the frequency and size of the risks they take on short-term market swings.  Investors more often hold their securities for long periods of time while traders hold securities for short periods. 

Qualifying as a trader may offer significant tax advantages. However, it is difficult to meet the definition.  Just calling yourself a “trader” or “day trader” is not enough. Here is what you need to know to help determine if you qualify.

Potentially Favorable Rules

Traders are subject to more favorable tax rules when it comes to deducting investment expenses and the treatment of gains and losses. The Tax Cuts and Jobs Act eliminated most investment expense deductions for investors from 2018 through 2025. Traders, on the other hand, can fully deduct their expenses as ordinary business expenses.

Investors can deduct only up to $3,000 in net capital losses from their ordinary income, such as wages and interest (with any excess carried forward to future tax years). But again, traders have more latitude. After making a valid mark-to-market election, a trader is not subject to the $3,000 limit.  Note that in exchange for these benefits, all of a trader’s securities gains and losses — including unrealized gains and losses as of the last day of the tax year — are treated as ordinary income or loss.

Trading as a business

Generally speaking, investors buy and sell securities and hold them for a longer term with the expectation that they will earn income from dividends, interest or capital appreciation. In contrast, traders typically seek to earn quick profits based on short-term market fluctuations. To show that they are conducting a trade or business, traders must participate in sufficiently substantial, continuous and regular trading activities.

Unfortunately, there is no bright line test for distinguishing between traders and investors, such as a minimum number of hours, days or trades per year. The IRS and the courts look at factors such as:

  • The amount of time you devote to buying and selling securities;
  • Typical holding periods;
  • The frequency and dollar amount of trades; and
  • The extent to which you rely on these activities for a livelihood.

By default, the IRS considers individuals who buy and sell securities investors.  The burden of proof is on the taxpayer to establish themselves as a trader. 

Weigh tax benefits

If you devote a substantial amount of your time to buying and selling securities, talk to your advisors about whether you qualify as a trader. If you think you do, weigh the tax benefits of filing as a trader against any potential drawbacks. 

For more information, contact Colin O’Neill at c[email protected] 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Forward Thinking