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Saturday, 11 August 2007 |
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Though it may sound like a simple dog trick, 401k Rollovers have nothing to do with animals and are sometimes very complicated. A 401k rollover entails moving funds from one account upon leaving a job to another retirement account, like an IRA. An IRA accounts stands for Individual Retirement Accounts. Technically, the money held in a 401k account isn’t your own until disbursed. It is being held in a trust that’s overseen by a funds manager. Since the rules governing the money are outside of the participant’s control, it’s important to pay careful attention to the rules.
The first ‘rule’ of 401k rollovers is to think about is where the money will go. Literally. Rolling over directly to another retirement plan or getting a lump sum paid to you are very different options. The second rule could be accurately completing all forms. This may seem obvious, but costly delays can occur if the paperwork isn’t in order. If paid directly to another retirement account, called a direct rollover, very few forms are filled out and no penalties paid. However, if the money is paid to the participant, many withholding can occur, like a twenty percent required fee garnered by the old company. Also, if the money received isn’t repaid to the new plan within 60 days, other takes and penalties can incur. There are many reasons to rollover one’s 401k opposed to taking other options. If the rollover is done correctly, there are no penalties for moving the money. With early withdrawal, many penalties can be assessed. Another good reason for a 401k rollover would be diversifying investment options; especially if rolling over to an IRA. Upon leaving one job for another, other options to the traditional 401k rollover to IRA may present themselves. Leaving the 401k with the former employer takes the least effort, but it may limit the return if the new employers plan is better. Cashing the account out instead of rolling over the 401k seems alluring, but paying penalties and cutting future savings is a huge liability. Transferring to an IRA in a 401k rollover seems to be the best option and the easiest. |
