When to Choose Different 401k Rollover Options

While there are many 401k rollover options for you to choose from, there’s one thing you’ll want to keep in mind before performing any of the viable options mentioned here below – how old are you?  As you might expect, your 401k rollover options are very different if you’re under the minimum retirement age of 59 ½ years old, as you may be subject to additional taxes and penalties if you perform certain types of rollovers at this age. Other rollover options can and will apply if you’re between the ages of 59 ½ and 70.

As an employee, the major advantage of a 401k plan is that the possibilities for return are limited only by market fluctuations and how much you’ve invested into the plan.  In addition, when you consider the benefit of employer matched funds, it’s easy to see why 401k investments are so popular with employees.  However, as you move from one job to another, you may establish several of these plans over time, leaving with you a patchwork of accounts across many different employers.  It’s at this time that you’ll want to consider your 401k rollover options.

When you leave an employer, you typically have four options to consider with regards to your old 401k funds.

First, be aware that you don’t actually have to move your funds away from your old employer’s account.  However, there are a number of limitations with this strategy.  First, employer-sponsored plans are typically more limited than private IRAs in terms of the investment options available.  Performing a 401k rollover to an IRA could increase your access to better performing investments and higher rates of returns.  In addition, consolidating your old 401k accounts into a single IRA can make managing your retirement investments much easier.

If, on the other hand, you decide not to keep your 401k account with your old employer, you can elect to roll it into your new employer’s retirement plan.  Unfortunately, if you go this route, you’ll likely be subject to similar limitations on your available investment options as you were under your old employer’s account.  Really, the only situation where it makes sense to move your funds into the new employer’s account is if the employer offers matched funds in proportion to the total amount you have invested in the account.

A better 401k rollover option is to move your funds into an IRA (Individual Retirement Account).  This allows your capital to keep growing, and perhaps even exceed past performance as your access to investment options expands.  Remember that if you do decide to rollover the money, you’ll want to ask for a direct rollover.  In this process, the manager of the new IRA will contact the manager of your old 401k and ask that the funds be sent directly to the new account.  This is a reportable event, but the IRS does not consider it to be a taxable event; therefore, the tax deferred status of your investments will be maintained.

As a final option, you can elect to cash out the plan.  Of course, you will have to pay the appropriate taxes and withholding, and if you’re younger than retirement age, you may have to pay an early withdrawal penalty as well.  All of these can substantially reduce the size of your available funds.  Remember that 401k plans are designed to allow you to invest for the future, so taking the cash option likely won’t in line with your goals for retirement.  Think about it long and hard before you take the option of cashing out the 401k account.

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