Understanding Your 401k Rollover Options


If you have a 401k with a current employer, when you retire or leave the company, there are 4 basic 401k rollover options. There are benefits to each, as well as disadvantages. Making sure you have a clear understanding of your 401k rollover options is the best way to protect your retirement. If you don’t choose correctly, you could not only wind up paying hefty fees but your retirement can become claimable by creditors too.

401k Rollover Option #1 – IRA/ROTH IRA

One of the most popular 401k rollover options is to roll the funds over into a personal IRA or ROTH IRA account. An individual retirement account comes with certain protections. There are no early withdrawal fees and the allowable contributions per tax year can provide you with a needed source of deduction from declared income. Funds in an IRA or ROTH IRA are also protected from creditors in the event of bankruptcy or other forms of liquidation judgments.

401k Rollover Option #2 – Rollover into new employer’s plan

One of the easiest 401k rollover options is to transfer the funds directly into your new employer’s 401k funds. This relieves you of all the burden of understanding any changes in tax reporting and also keeps the funds protected from any creditor action. One of the benefits of joining a new employer’s plan is it lets you maintain your contributions whereas there may be a decrease in the allowed amount should you switch to an individual retirement plan. You can also take advantage of any other plans and bonuses that your new employer has in their plan. A disadvantage is that it places your retirement funds out of your management control when you are much closer to retirement than when you began your career.

401k Rollover Option #3 – Keep it in your former employer’s plan

One option for a 401k rollover that may be available to you is to keep it in your former employer’s plan. Most times you can still make contributions and they retain the same tax reporting status as if you were employed by the company. Companies are willing to offer this as it benefits the liquidity of their entire retirement portfolio. In many cases, this can be a win-win situation for both of you. It is very important to review the terms and conditions of your former employer’s 401k plan to see if this is an option for you or if it comes with any restrictions.

401k Rollover Option #4 – Cashing out

Cashing out, while tempting may not be the best option for a 401k rollover. It depends entirely on the other financial circumstances that are influencing your life at the time. Cashing out not only makes you subject to early  withdrawal penalties and a different set of tax reporting regulations, but it also returns the amount into your liquid asset portfolio which means it can be attached by creditors. Don’t make the decision to cash out until you talk with an investment professional. There are valid reasons and benefits to choosing this option, but they will fit very few people.

What should you do?

Deciding which of your 401k rollover options to do is serious business. Retirement planning is something that should always be done with the help of an investment and planning professional. Keeping up with all the changes in the tax laws alone is too much for most individuals. To make sure that your retirement is kept safe and can continue growing until you are ready to use it, contact an investment professional. Many companies will also offer a consultation from their own investment team as part of your exit interview process to help you understand your 401k rollover options better.