Rolling over a company sponsored 401k plan (403b, TSP, 457 plan) into an Individual Retirement Account (IRA) is generally thought to be the thing to do when you leave a job. This is an option any time you change jobs, whether you parted voluntarily or involuntarily. Some 401k plans also offer what is known as an in-service distribution, which allows rollovers even while you are still with the company. Determining when to rollover your retirement account is similar no matter why you left your employer or are considering an in-service distribution.
Many company retirement plans are profit sharing 401k plans. Once you leave the company, you have several options for what to do with this money. These include:
-Rolling your money into an IRA
-Transferring it to your new employer’s 401k, if their rules allow
-Leaving it where is is in your current 401k, if you meet the plan’s minimum
-Cashing out the plan, paying taxes and penalties and keeping the balance
For most people and in most situations, a rollover seems to be the clear choice. An IRA has lower fees than most 401K accounts, and offers many more options so that you can completely diversify your portfolio. You can also choose where you start your IRA by comparing options offered, fees, benefits and features. There are some things to consider before deciding this option is for you, however.
Both 401k accounts and IRAs provide tax advantages for your investment. Taxes are deferred in both accounts until you reach retirement age. If you need to withdraw money before you reach retirement, though, or if you decide to retire early, the rules can be very different. While there are exceptions, in general IRAs require you leave the money untouched until you have reached 59 years and 6 months of age. Withdrawing money before this time will incur a penalty tax of 10 percent on top of regular taxes.
In some cases, 401k plans do not change much when your employment ends. In this case, you will still have the same access you had as an employees. You will be able to alter your investment options just like the company’s current employees. If this is how the rules of your 401k work, check to make sure the fees don’t increase as a former employee either. If these also remain steady, you may want to leave your money in the account.
Some 401k accounts include additional benefits such as investing some of your money into company stock. If this is the case in your 401k account, you may want to consult a financial planner who can explain and calculate net unrealized appreciation to determine your best option. It is important to note that this financial planner should not be employed by either your 401k or the IRA.
For most people, a rollover from 401k to IRA is the best option when they are leaving a job. However, there are some things that can make this decision cost you. Considering all aspects of your individual situation before committing to a rollover is the best way to protect your investment and your financial future.
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