One of your most flexible 401k rollover options is moving your full account value into a rollover IRA. An IRA gives you greater freedom in choosing investments than a 401k rollover option. You can decide for yourself whether you’d like to invest your retirement assets in insured bank accounts, mutual funds, individual stocks and bonds, or higher risk investments such as options or futures. You can choose among a wide range of IRA providers, or custodians, as well.
As you consider your options, keep in mind that one of the greatest advantages of a 401(k) plan is that it allows you to save for retirement on a tax-deferred basis. When changing jobs, it’s essential to consider the continued tax-deferral of these retirement funds,
Rolling over to an IRA also gives you greater control over when you withdraw your money. With a 401(k) plan, you usually can’t start taking withdrawals until after you retire. An IRA is more flexible, since as soon as you turn 59 1/2, you’re allowed penalty-free withdrawals, even if you’re still working.
Similarly, you usually must begin taking money from your 401(k) as soon as you retire. If you have income from other sources and don’t want to take withdrawals from a tax-deferred account that quickly, an IRA will let you postpone withdrawals until April 1 of the year after you turn 70 1/2. In fact, many retired people roll over their 401(k) retirement assets into IRAs to avoid having to take money out.
Four Options: 401K Rollover Options
- Roll over into an IRA By rolling the money into an IRA, you gain more control, have more flexibility in your investment options, and can benefit from the guidance of an Advisor. Plus, your funds grow tax-deferred. An IRA rollover makes it easy to track these funds by keeping them together.
- Roll over into your new employer’s plan. Many employers will allow you to move the money from your former employer’s retirement plan into your new plan. Check with your former employer. Keeping your money in one employer retirement plan may be convenient, but you may have limited control over your money and the investment options
- Keep the money in your former employer’s plan. If your balance is $5,000 or more, you may be able to leave the money in your former employer’s plan. This may be the simplest option, but disadvantages exist. You may have limited control over your money and investment options, and you may find it difficult to keep track of your money through the employer’s administrator.
- Take your money out of your former employer’s plan. You do have the option to withdraw some or all of the money in the plan. However, the money you take out may be taxable income, subject to a mandatory 20% IRS withholding, and a 10% IRS early withdrawal penalty. These taxes and penalties can drastically reduce the amount of money available to you at withdrawal.
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