401k Rollover

To roll or not to roll, that is the question. You have been working long and hard for many years now. You could be at the same employer or perhaps you have worked for several different ones over the years. While working you made it a point to take advantage of the 401k because of the match they were giving you. Now that you have left your employer (career change or possible retirement), you have an important choice to make. You can either leave the money with your previous employer in the 401k plan or you can do what’s called a 401k rollover. The former seems like the easy option but let me give you some reasons why you want consider rolling over to your own personal Individual Retirement Account (IRA).

1. Variety in Your 401k is the Spice of Life

If you had a choice between a world class buffet or a menu with 3 choices, what would you choose? Personally, I’m going with the buffet (in moderation of course). With a 401k you are mostly limited to mutual funds. On top of that, you may only have 8 mutual funds to choose from. I have seen 401k’s with as little as 8 up to 40 choices. That may seem like enough, but when you roll over to an IRA you have now opened the doors to hundreds of other mutual fund companies and thousands of other choices. But it doesn’t stop there. You can also invest into individual stocks, bonds, annuities, CD’s, unit investment trust and on and on and on. In fact, if you wanted to take all your money and put it all in one stock you could. (Warning: Please do not do this. This will make your financial advisor very nervous)

2. Stretch Out the 401k

Up until recently, any non-spouse beneficiary on a employer retirement plan was forced to cash out over a 5 year period upon inheriting. Thanks to the Pension Protection Act that has changed…..kind of. An “inherited IRA” has to be open and the money has to be rolled into that for it to work. So why not take the safe route and roll it into an IRA. What a Stretch IRA does is allows your beneficiaries to take smaller portions out based on your life expectancy. That it turns means that the bulk of the money will still grow tax deferred and stretch out what you pass on to your kids.

3. Simplify and Consolidate

I have had clients with up to six different 401k plans. Why not consolidate into one IRA to make sure that all the investments are working together and complimenting each other. Also, at age 70 ½ the IRS steps in and starts making you take out a percentage each year in the form of Required Minimum Distributions. This figure would have to be done on each retirement plan and if for some reason you miss it, the IRS imposes a pretty hefty penalty (50% of the amount that was required to be withdrawn).

Rolling over your retirement plan can be a simple process.Next time I will share some common mistakes to avoid that will make the rollover process an easy one.


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