401k Rollover Answers

When you find yourself in the position of leaving a job for a new challenge you can’t forget to plan for your 401k rollover. It is true that you have more options than simply rolling the money into a new account. You could cash it out, but that option means that you take the huge hit on taxes plus a 10% early withdrawal penalty. You could also leave the cash where it is, with your old job and the old retirement plan. That is certainly a better option than cashing out, but only just. If you leave the account open with your old employer, you are not getting your money’s worth. So the sensible 401k option is a rollover.

Once you have fixed the decision to move the retirement funds, you have to decide between two options. You can decide to place the money with your new employer’s 401k fund. You could also decide to jumpstart an IRA (individual retirement account). There are a few nice benefits to putting the money in the new 401k account. Chief among them is that as you add to the fund, you have that much more money working for you. That’s a nice benefit and not one to discount lightly.

On the other hand, if you are serious about your finances and you have some discipline, moving the money to an IRA could be your best 401k rollover option. There are several attractive qualities about an IRA, as opposed to a 401k account (even an individual 401k account). First and foremost, you have control of the funds. You decide which company to go with and you can base your decision on the types of funds, fee and track record of the company. With a traditional 401k you have no control over those things.

Once you are ready to execute the rollover, you need to know the 401k rollover rules. The 401k to IRA rollover happens in three steps. First, as you’d expect, you have to open an IRA. Do your research on this. Don’t just get swayed by advertising or even the opinion of friends or family. Here’s what your need to know: How much are the fees? What funds are available? What’s the track record for this company over the last 5 years? 10 years? Everyone has taken a hit with the recent economic crisis, but how has this company weathered the storm? Hiring a fund is not that different than hiring an employee. You are trusting these people with your future, so don’t go with just anyone.

The next step in the 401k rollover to IRA process is the actual transfer. This is the easiest part of the whole process and the one that people sweat the most. Check with your HR department before you leave your job. In most cases the rollover request is a single form and often it is a single page form. The basic information needed is simply where to send the money. You will include the fund name and routing and account numbers and that is about it. Since you are doing it this within the allotted time frame of 60 days, you should not have to worry about taxes of any sort. If it is past 60 days since you left your old job or if you have any concerns about taxes, it is always worth checking with a professional.

The last step is simple: choose where to allocate the money. What funds do you want to choose? There are three basic kinds, although they get called all sorts of names. You have low risk funds. These are filled with blue-chip stocks, or they might be a combination of slow growth stocks and bonds. There are high risk funds which have international stocks, municipal bonds, and emerging industry stock. The lowest risk funds will really be nothing more than a money market account housed within the company.

If you are still not convinced, here are some more reasons why choosing to fund a new IRA with 401k rollovers is a great way to maximize your retirement dollars:
1. The money you rollover does not count towards your yearly IRA contribution. IRA’s, like 401ks, have a yearly limit that can be contributed. A rollover does not impact that at all. You can still contribute the full amount (it varies depending on your age and income) for the year.
2. You can still (and you should!) sign up for your company 401k plan. Particularly if your company provides any sort of matching, making sure that you put a certain percentage of your wages into the 401k. The matching is truly free money and since the 401k is funded with pre-tax dollars, you will never miss the money. It is still the best way to save for retirement.