Why You Should Opt For a 401k Rollover to IRA

Moving from one employer to another involves making several arrangements, especially regarding your retirement funds.

If you actively participated in a 401k plan, you also have to decide what you want to do with it.

You could do three things:

  • Cash out your 401k
  • Retain your 401k in the current plan
  • Move it to a qualified retirement account

By a qualified retirement account, I mean your new employer’s 401k plan or a traditional IRA or a Roth IRA. When you move your 401k to any one of these, it’s called a 401k rollover. After some extensive research, I opted for a 401k rollover to IRA. However, before I tell you why, let’s look at the option of cashing out your 401k.

Should you cash out your 401k?

My first thought on getting my new job was to cash out my 401k. But, I discovered that I’m liable for the tax on the withdrawal, and that’s certainly not what I wanted. There is a hefty federal and state tax of 35 percent as well as a ten percent early withdrawal penalty because I am less than 59 ½ years old. So, if I cash out $100,000 from my 401k, I would end up handing over $45,000 in the form of taxes and penalties, with just $55,000 left over from my hard-earned cash.

 Not a good situation at all! Retaining your 401k is a good idea, provided you get some great investment options and low fees. But I was not too sure about this, so I decided to look at a 401k rollover to IRA.

I found that with an IRA, my expenses could be a lot lower, while giving me access to plenty of investment options. I could even do a 401k rollover to a Roth IRA and ensure that my retirement savings grew, tax-free.  Having said that, let me explain how a 401k rollover to IRA works:

  1. Start an IRA account with a trustworthy financial institution that offers you a variety of investment options at reasonable fees.
  2. Let your employer know that you want to do a 401k rollover to IRA and request that the check is payable to the financial institution where you opened your IRA. This will enable you avoid the 20 percent tax withholding.
  3. After the transfer is done, you can invest your money appropriately.

If you are still wondering what your advantages are, you benefit through lower costs and more flexibility. Of course, you will need to shop around for a trustworthy investment company where you can open your IRA. I chose Zecco/Tradeking/optionsxpress as they came highly recommended. Just make sure you get all the details right, especially when you transfer your money.

If you do an indirect IRA rollover, you must sacrifice 20 percent in tax withholding, and you have 60 days to deposit the money into a qualified retirement account.

Instead, opt for a trustee-to-trustee transfer like the one I did, so that your assets move to the qualified retirement plan without any penalty or expense.


Return from 401K Rollover to 401K Plan


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