401K & IRA Rollovers

The current tax laws allow 401K, IRA, Roth, SEP, Simple, (after 2 years), 457, pensions (if the plan allows) and 403(b) plans to be rolled over to an IRA.

In almost all cases, a tax free direct rollover is worth considering because it gives you more control, flexibility and increased investment options. In most cases it will also reduce your expenses.

The best type of rollover is a direct, trustee to trustee transfer where the money goes from one institution to another. You can have the funds sent directly to you first, but this is not recommended because 20% federal tax will be withheld and you must redeploy the funds within 60 days to avoid significant tax consequences.

Multiple accounts can be combined, if desired. This results in simplification. Most investors already get too much paperwork.

If you have an older 401K with a former employer, consider a direct rollover. Rollovers can reduce your costs which should lead to higher returns.

You typically have four choices for handling money in a former employer’s plan:

  1. You can do nothing; the money will remain where it is.
  2. You can move the money to your new employer’s retirement plan (if the new employer permits this, and most do.)
  3. You can move the money to an IRA.
  4. You can liquidate the accounts and spend the money.

The best answer is #3. Here are 6 reasons why.

  1. You get more and better investment choices. Some people think they are not paying fees inside a 401K plan. This is erroneous. Fees exist and they are often higher than you think. They are often not disclosed openly. You have to read the fine print. It’s there, but sometimes hard to find.
  2. You get access to better advice. There are impediments to knowing which investments are the best choices. Good advice is often not available to 401K participants.
  3. There is no cost to move your funds to an IRA. There are no taxes, penalties and usually no fees to make the transfer.
  4. IRA rules are friendlier to investors than those for old retirement accounts. When you reach 701/2, you must begin to make withdrawals. You can satisfy this requirement by withdrawing from one IRA account, even if you have many. If you have several employer plans, you must make a withdrawal from each one which can be an administrative chore. After 59 1/2 there is no tax penalty for early withdrawal.
  5. Moving to an IRA gives you complete control over your funds. You’ll never again have to deal with your former employer’s HR department or its plan administrator.
  6. An IRA is more convenient. It is easier to manage and reduces the risk you will violate any of the tax rules.