401k And IRA

Congratulate yourself -- if you're leaving your job for good and retiring (but still have certain questions about your 401k). If you are leaving, it means you probably took some interest in, and researched the subject of, a “rollover 401K” -- and thereby previously made a concerted effort to establish a retirement account at your place of employment. By doing so, a portion of your pay was directed into a tax-deferred vehicle that made it possible for you to collect funds, most probably to be used for retirement. You didn't necessarily have to save money through the 401k, although you did it, as you either studied it or then understood its advantages, or maybe you heard that it was a good option from a friend or family member.

So, to rollover a 401k means shifting a 401k plan from a previous or present employer into an IRA or another eligible plan. IRA stands for individual retirement account and has similar rules as that of the 401(k). A plan like this is not absolutely needed to consolidate one's retirement account into an IRA, although a fair number of people have decided to opt for a rollover, for many reasons. One example being that if one contributes to several 401k plans in one's lifespan, s/he may find him/herself doing several rollovers over the years.

Your first impulse though, may be just to cash out your on hand 401k funds. Think it over carefully before making use of this option, because you're certainly likely to be penalized, provided you take a withdrawal from your funds before the age of 59½. Let's assume you were contributing to a traditional 401k plan and you cashed-out the accrued funds: you'd be held responsible for paying the tax on all the money you put into your plan. Plus, in addition, you’d probably have to pay a 10% early withdrawal penalty.

Something else to keep in mind is the convenience and ease of management which comes along with consolidating all your accounts into a single account. In the case of having multiple accounts, you would get statements from many fund companies, and therefore, you may be less inclined to review each statement in detail, and therefore you may not review them and keep on top of all the individual details and reporting requirements as often as you should.

The largest potential advantage of rolling your 401k into an IRA though, may be the very small expense to do so. Because, not all 401k and IRA plans have high internal expenses, even if many do. So again, due diligence can pay a great return. Look: some investors often ignore the impact of these high fees, which can eventually lead to disappointments or strong regrets about how a portfolio was handled. This is ironic, considering that these rollover fees (besides a few other expenses) are among the only aspects of your investment account(s) that you can actually control.

One other item worth thinking about when considering a rollover to an IRA is the potential for your former employer to become insolvent, merge with another company, or any other severe circumstance that you might not have any control over. Or, your account could be transferred to a new platform which you don't like as much as what you have now; in which case your previous employer may change their 401k plan or merge with another one.

Here again, were talking about the major advantages of convenience, control, and ease of management – in regards to a rollover or consolidation of your account(s). And by consolidating all your accounts with an independent third party, it will be easier for you to monitor all your funds. Investing money in a company’s 401k plan is a good way to save money, for sure. As a matter of fact, a number of advisors will tell you that their clients save fantastic amounts of money through a retirement plan, without ever utilizing a mutual fund or brokerage account. This is normally the advice given with tax implications in mind. In other words, why pay capital gains taxes or regular income taxes on money you won't actually need until some time well into the future? So leaving money in your retirement plan, letting it grow, and planning for your future may just be your best bet. Because the advice to rollover your 401 K is certainly a good and practical one, once you’ve done all your homework.

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