401(k) Rollover Rules

401(k) rollover options are a lot simpler than you might think.

Rollover Choices
If you are leaving your current job or about to retire, a 401(k) rollover is certainly worth considering; but before you can make a decision, you need to know what all of your options are. Simply put, you have the following options according to 401(k) rules:

  • Leave your money in your former employer's plan.
  • Roll over your money to your new employers plan.
  • Roll it over to an IRA.
  • Cash out the account and pay the associated taxes and penalties.

Perhaps the simplest option is to leave your money in your former employer's 401(k) plan. This option saves you the hassle of moving your money around and allows you to keep your money in the same funds that you already have. However, sticking with a former employer's plan prevents you from making additional 401(k) contributions and may result in additional fees and restrictions that you didn't have as an active employee.

Roll Over Your Account to Your New Employer
A second option is to move your funds to your new employer's plan. This option allows you to continue to make contributions to your account and may open new investment options to you. Since each company has its own eligibility rules, you may have to go through a waiting period before you're allowed to make new contributions.

Rolling Over to an IRA
If you're looking for more investment choices, rolling over your 401(k) to an IRA may be a good option. This retirement account allows you to choose your investments from a wide range of offerings, not just the funds held within your employer's plan. Money held within an IRA may be withdrawn penalty-free for certain qualified expenses, such as the down payment on your first home or for college expenses. Loans may not be made from an IRA, however.

Cashing Out
This option allows you immediate access to your money but will leave you responsible for state and federal income taxes on the money. It could result in an early withdrawal penalty if you are under 59 ½ at the time of the withdrawal.

How to Carry Out a Rollover
After you have considered your options and chosen the one that is right for you, you'll need to take the necessary steps to set your plan in motion. If you will be moving your money to an IRA or to your new employer's plan, you'll need to start by setting up an account. You'll fill out paperwork to create the account and make investment choices, then fill out transfer paperwork with your former employer.

If you plan to keep your account with your former employer or to cash out your plan, you'll need to make the benefits office aware of your intent and fill out any associated distribution paperwork.

Roll Over Your Way
With four different options for your 401(k) funds, there's a lot of room for choice. Consider each option carefully and then choose the one that gives you the greatest control over your future.

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