What is a 401k rollover?

401k Rollover

A 401k rollover is the process of transferring your account with your old employer to a new employer 401k or IRA.  This happens if you decide to change jobs or want to just rollover your 401k to a personal IRA or Roth IRA.  This process is referred to as a <strong> 401k rollover, rollover 401k, or IRA rollover.

The money in your 401k can be rolled over from your existing 401k to a IRA, which stands for Individual Retirement Account.  IRA’s the same thing as a 401k.  The only difference is that there is no employer contribution.  You can still choose from a variety of different investment options such as mutual funds and stocks.

Your 401k After You Lose Your Job

There are many individuals who have lost their jobs due to the economic climate and are leaving their former employers taking their 401(k) retirement savings with them. The good news is the 401(k) retirement funds you have accrued are your savings to do with as you wish. The downside however is that a fair amount of individuals will take penalties and losses that are not necessary because they withdrew theirmoney early from the plan.

In order to affect a positive transaction with respect to the 401(k) and not incur a penalty or loss is to simply transfer your existing retirement savings to another retirement account. The action will also allow you to defer your tax. This action is referred to as a 401k rollover.

The 401(k) is supplied with dollars that are pre-tax dollars. This means your retirement fund continues to grow and is not taxed until you begin withdrawing from the fund, preferably when you are at retirement age. An individual who takes an early distribution from his or her401(k) is going to be taxed on those dollars. In addition you may receive a penalty of ten-percent. The early distribution status applies to individuals who are above the age of fifty nine and one-half years of age. This is not a positive move for you financially, if you are under 59½ and do not need the money for anything outside of a critical emergency situation.

401k Rollover Options

There are many rollover options available to you where you won’t be taxed and not receive a penalty for withdrawing the money early. The first area where you will need to make a decision is where you’d like to transfer the money. There are generally three choices you have in order to implement the rollover.

The first choice is to roll over funds into your new employer’s 401(k) savings plan. In the majority of circumstances you may roll over your old 401(k) into the 401(k) plan where you have received new employment without difficulty. However, secondly you will need to assess whether or not this is a good financial decision. In order to establish whether it is or not, you will need to weigh the pros and the cons with respect to the rollover.

401k Rollover Into A Roth IRA

You can also rollover your 401k into a Roth IRA.  A Roth IRA is like a IRA except for one big difference.  The money you put into a roth IRA is after tax dollars.  So instead of putting your money into your 401k pre-tax, you are taxed on the money now, and when you retire, the money in your roth 401k can be taken out tax free.  When you take out money in a 401k account, the money is taxed as you withdrawal.

A 401k rollover is always an option if you want to change your investment strategy.  If you decide you don’t want to pay taxes when you are retired, you should rollover your 401k into a roth IRA.  This way, you can reap the benefits of tax free money and you also know how much money you will have when you retire.  When you have a 401k, you will not get 100% of the money in that account, you have to put taxes into the equation.

What are you options for a 401k Rollover?

401k Rollover Options

You can rollover your 401k into a IRA, Roth IRA, or you new employers 401k account.  It’s up to you to decide what is the best option for you.  A lot of this depends on your age.  If you are nearing retirement, you may just want to transfer to another 401k or IRA because you do not want to pay taxes on that money now.  If you are a younger person, the roth IRA is always a very good option for a 401k rollover.

Advantages to Rolling Over Your 401k to a New Employer’s 401k

1. You will not be limited to a minimum investment in order to roll over your current retirement savings into the new account. This means if you haven’t saved that much money yet, you will not be in a position to diversify retirement savings within varying funds: in this regard a rollover to the new 401(k) makes good sense. Also keep in mind many of the mutual fund companies require that you have at least $2,000 in which to invest or to open up an account.

2. Even if your current 401(k) is above the $2,000 mark it still may not be wise to roll over the old 401(k) into a new brokerage account: the key here once again is diversification. In example if you have saved a minimum of $4,000, you will have a difficult time diversifying your funds at this (monetary) level. It would be best, if the preceding scenario pertains to you, that you (again) simply roll over your 401(k) into your new employer’s 401(k) account.

Disadvantages to Rolling Over Your 401k to a New Employer’s 401k

1. You may lose a great deal of leverage in simply rolling over your existing 401(k) to your employer’s plan. In this regard you are expected to abide by the rules of the new plan and this may not be to your liking, particularly if you are avid about investing. You will be held to the investment choices they offer. You also will not be able to get to your funds unless you want to attain a loan—that is if it is allowed.

2. The only way you may access your funds will be if you initiate a loan against your retirement savings (if allowable); or you terminate your present employment.The second possibility as far as options is to roll over your current 401(k) into an IRA at a brokerage firm. A good place to roll over your existing 401(k) is a brokerage company offering discounts or even zero commissions. The upside potential and downside of this type of arrangement follows.

Advantages to Rolling Over a 401k into an IRA

1. You will be able to invest in ETFs or exchange traded funds. There are literally thousands of various types of ETFs offered on the market which is favorable for a person who likes a great deal of flexibility with regard to his or her investments. The positive attributes of ETFs include: a) low cost, and b) no minimum with respect to amount of investment. The latter is due to the fact that the ETF trades the same as a stock. In other words, the exchange traded fund due to its flexibility offers a good investment option in the way of a retirement savings vehicle.

2. Additionally, outside of the fact you may invest in ETFs you can further diversify your retirement portfolio by purchasing mutual funds, individual preferred stocks and bonds. If you are a person who appreciates a great deal of diversification then you may wish to further consider an IRA at a brokerage house.

Disadvantages to Rolling Over a 401k into an IRA

1. The expense is most generally your biggest downside. In other words, each time you trade with regard to most brokerage companies your “pocketbook is going to suffer.” Most brokers will assess a fee whenever you place a trade.

2. That is not all, if you trade an exchange traded fund you will be assessed other expenses on top of any commissions with respect to the trade.

3. Additionally, certain brokers will charge a fee for placing a mutual fund trade generally referred to as a transaction fee. Normally you are not assessed this fee if your mutual fund is housed within a 401(k). The transaction fee probably would not apply either if your account was solely with the mutual fund company. The final and third option you have with regard to rolling over your 401(k) is to initiate the transaction by way of a mutual fund company.  The positive and negative aspects of this type of rollover will follow.

Advantages to Rolling Over Your 401k into a Mutual Fund

1. The rollover into the mutual fund company is generally the most economical way to invest your money. Normally there are no commissions and in the majority of situations there are no fees—that is if you meet some essential requirements.

2. For some using one company with respect to retirement savings makes checking the status of his or her investment easier.

Disadvantages to Rolling Over Your 401k into a Mutual Fund

1. Persons seeking diversification and flexibility may not prefer this type of option. In this regard, you are limited to the mutual fund company and the investments it offers. In other words, if you are the type of individual who likes to invest in preferred individual stock(s) as well as exchange traded funds, you are not going to have that capability by placing all of your retirement savings within a mutual fund company IRA.

2. Secondly, there generally are investment minimums in order to establish the account. Such minimums can amount to anywhere from five-hundred dollars to three-thousand dollars.  Now that you know your options with respect to rolling over your 401(k), you may be curious as to how the entire procedure regarding rollover works. Following is a step-by-step outline of how to roll over your 401(k).

1. The initial step involved in rolling over a 401(k) plan is to check eligibility requirements with your previous provider. Assure there will notbe any surprise fees and be certain that your status shows up within their database as an employee who has been terminated from the company you previously worked. You do this because your previous provider will not be able to release the funds until you are shown within their company records as no longer having employee status. This means if your prior employer has not informed your old provider that you are no longer an employee, the funds cannot be transferred. In summary of this point, make certain there are no fees incurred with regard to the transfer of funds; and, assure your former provider has you listed as terminated from employment.

2. You may ask your old provider, after you have assured you no longer are listed as an employee to send you paper forms in order to transfer funds. In the majority of cases, paper forms are used in order to roll over 401(k) funds to a new plan. The forms may need to be attained through the mail, by way of fax transmission or email. Particular plan providers will ask you to supply a rollover request form from the new provider. If this is the situation then you will need to proceed to step number three.

3. You will need to determine what is required in order to transact the rollover (transaction). In example, ask whether or not your new plan provider expects you to open the new account first; and then provide the rollover form for processing. In other scenarios, once you submit the form you have in effect also rolled over the old 401(k) account into the new plan. Regardless, make certain you have what is needed from your old provider in order to roll over the funds properly into the new account.

4. When filling out the form you will want to make certain it is completed properly and all the right boxes are checked. In example, if you are asked what type of distribution you are making, you will want to make certain you indicate it is a direct rollover. You can always call the appropriate provider if questions arise.

5. Lastly, you will submit the new forms to the new provider. Also you will need to administer deposit of the funds. In most cases, the funds are sent in the form of a check. If you haven’t received a check within a reasonable amount of time then give your old provider a call and ask when you can expect them. You may wish to keep in the back of your mind, your old provider will not be all too willing to release the funds and see them go. In other words, they’d much rather see the funds inside of their plan than see them transferred to the new company. In some cases the funds will be deposited to your new account. In this regard, assure the funds are in your new account when scheduled.

In summary, the 401k rollover will keep you from incurring a penalty for withdrawing the prior 401(k) funds early and allows you to defer taxes. If you do not need the funds for any dire emergencies then it is best to always roll them over; and allow your retirement savings to continue to grow on a tax-deferred basis.