One of the largest vehicles for retirement in today's economy is a 401k. This is a plan offered by many businesses to their employees. By the employee setting aside a certain amount each month it has become a benefit-defined retirement plan. Money put into this kind of a plan is invested which allows the money to grow but sometimes circumstances change and the owner wants to move it to a different arrangement. This is called a rollover 401k plan.
First, one should really understand what a 401k is, other than just a retirement plan. This is sponsored by employers so only people working for them can enroll. People who do not like the 401k rules or do not have an employer with this plan can enroll in an individual retirement account (IRA) instead.
There are three steps an employee must do to enroll in this employer sponsored program. This is to fill out paperwork, either online or at work, plan orientation sessions or read the manual and decide how much is to be deducted from the paycheck to be applied to this investment. In addition to the traditional plan there are Roth 401(K)s as well.
When it is decided that these funds are to be rolled over to something else there are options. This money is portable, so can be moved (including employer contributions). The four options available are to leave it in the current plan, if allowed, transfer to plan sponsored by a new employer, transfer to an IRA or cash it out.
If the latter course is taken it should be noted that the person cashing out will be charged income tax plus an early withdrawal fee. Cashing out is a poor choice as this money is supposed to be saved for future retirement. As years go on it gets harder and harder to build up a good equity so starting early and leaving the money alone is the best option.
The most sensible thing to do with one's 401K rollover is to put it into another tax-deferred account. It is possible, when doing this, to do a partial rollover if desired. This means, putting part of the account into something such as an traditional IRA. If one already has this kind of an IRA then there is a choice of adding to the account on hand or opening another IRA. When the second choice is made it is easy to follow the earnings trail.
It is not possible to transfer these funds into a Roth IRA because of the difference in the way it is set up for tax purposes. If one have a regular IRA they can add the rollover funds and then convert the entire package into a Roth. This sounds confusing but it can be easily explained by a financial adviser or the institution that holds the Roth.
When transferring to a new job it is always good to examine their retirement package. These plans differ and the new employer may have one that has lower expenses and better contribution arrangements. By doing a rollover 401k a person still has the option of obtaining a loan on the account, if needed, where they would not have this advantage if the rollover were made to an IRA which does not allow loans.
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