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Greetings, Chris, and welcome. You asked:

<<My wife quit her job of 14 years last December. She has about $50K in a 401(k) plus some in a state-run retirement account.

First, I looked up something on the FAQ/Notes for Retirment Investing that said:
"State and local governments are prohibited from offering 401(k) plans to their employees. This was once true of private, tax-exempt employers as well; however, as of January 1, 1997, the latter may now establish a 401(k) plan for their qualified employees."

Well, both my wife and I have 401(k)'s as employees of city governments. Why does the FAQ say this?>>

As of 1/1/87 and through 12/31/96, tax-exempt employers were not allowed to adopt 401k plans. Some (a very few), though, had adopted 401k plans before 1987. Those plans were allowed to continue. Additionally, on 1/1/97 non-governmental tax-exempt employers were again allowed to adopt 401k plans. Evidently your employer is one of those that had a 401k plan in existence before 1/1/87.

<<Second, what are the pros/cons for rolling over her 401(k) into an IRA?>>

Around Fooldom we believe the biggest advantage is the broader selection of investments available in the IRA as opposed to the limited, often mediocre and costly, choices within most 401k plans. As to a disadvantage, as Edcosoft pointed out there are rare cases when simply taking the money and paying income taxes on the distribution may be appropriate. That option, though, requires close examination because it's contingent on a whole host of factors such as your income tax rate today versus that in retirement, your age today, your need for the cash for income, your overall net worth, and a few other things. If your spouse was over the age of 55 on separation, if you are in a 31% marginal tax bracket today and expect to stay there, and if you have no need for the cash in retirement, then you could cash out today to enjoy a minimum income tax burden on your family over your lifetime. However, before you take that step you should consult your tax advisor. For most folks, it simply is not a good option.
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