Is it best to roll over a 401k into an IRA before taking the money out?
Often, no. You may take withdrawals from a 401k at an earlier age. Your 401k may have better creditor protection under federal law.
On the other hand, rolling it into an IRA may give you more investment options (not necessarily better ones - some 401k plans are excellent). Also, if it’s rolled into an IRA, and you’re over 70-1/2, you may aggregate RMDs across multiple IRA accounts. You may not do that with 401k plans. And finally, just on a general administrative level, it’s often easier to deal with an IRA custodian rather than a 401k custodian because the 401k is tied specifically to the former employer and the former employer’s plan.
That said, we do often recommend folks roll former employer 401k plans into current employer 401k plans rather than IRAs - while one is still working - if the new plan is excellent, with low costs, good investment options and administrators we like. But that’s more of an issue regarding keeping the 401k investments intact on an ongoing basis, not regarding “taking any money out” as you’d asked. It would help if you could describe more about what you mean by “taking money out” — are you retired? How old are you? What are your investing goals? What other investments and investment accounts to you have?
Depending on your 401k plan, it MAY be better to roll your 401k into an IRA. Frequently 401k plans have a large number of participants, limiting options and ease of distributions. Discount brokers such as Schwab, TDAmeritrade, Fidelity and many others may be able to handle specific needs of you as an individual and not be bound by the masses of a company plan. Comparing your current 401k plans to these services would be advisable before making any moves.
In reality, it doesn’t make a difference in terms of taxes and getting access to your money. We believe it is in your long-term best interest to roll the money over when you leave your employer depending on how expensive your 401(k) plan is versus your investment advisor. You also gain in terms of flexibility in your investment options. Nothing changes in terms of taxes or your ability to gain access to your money. You are just rolling your funds over from a more expensive bucket into a more cost-effective bucket.