What Is A 401K Rollover?

What is a 401k rollover? If you change jobs and then decide to transfer your 401k to another plan administered by your new employer, in financial jargon this process is known as a rollover. If you do change...

If you do change jobs and then decide to transfer your 401k to another plan administered by your new employer, in financial jargon this process is known as a rollover. Of course you may be employed by a company that doesn't participate in which case you may want to cash it out. If you cash out your 401k, you may be assessed up to 20% of the amount in taxes and fees; you also have 60 days in which to change your mind and rollover the funds into another retirement plan. Most employers don't allow you to rollover your 401k while you are still employed by them.

Investment analyst and tax expert Paul Dlouhy advises "The rollover is the action you should take if and when you do leave an employer so you have control over your 401k" and most experts agree that the rollover is the best option from a financial point of view. By transferring the money straight from one employer's 401k to another, you will not have to pay any taxes on the amount. You won't touch your money during a rollover transaction - your money goes straight from your current 401k into your new 401k.

If you are doing a rollover from one company account to another, your new company should basically handle the procedure, any paperwork involved and the actual transfer of funds. If you are thinking of transferring to another 401k account, check out the new plan for yourself - the range of investments offered and its growth potential. Dlouhy also points out some of the associated rules "Your new employer is legally obliged to check out your old 401k and make sure everything is run legally and according to regulations - this is usually just a formality."

You may also have the option of transferring your money to other types of retirement accounts - perhaps a traditional or Roth IRA. A rollover to an IRA has the advantage of letting you keep the all-important tax deferred benefits of your 401k as well as generally offering more investment choices. Most 401k plans don't allow partial rollovers - you must usually withdraw all your money although it can be transferred into different accounts.

"Don't feel you have to do a rollover" warns analyst Paul Dlouhy "Most companies will allow you to keep their 401k plan even if you no longer work there and it may be worth doing if it's a particularly strong plan" Some investment plans offer a particularly strong and diverse range of investment options that you may not be able to easily find elsewhere. However, your old company may not encourage you to keep your 401k with them, because of the costs to them of administering the plan. Plus you will no longer be able to contribute or receive matching funds at your previous employer.

If in doubt about your rollover options and especially if you are close to retirement age - always consult your tax advisor for options. (See question 9) If you are in the position of being able to do a rollover, take some time to think about the decision that is best for you and your situation, financial goals and objectives.

© High Speed Ventures 2011