home - rollover basics rollover basics | the rollover process
401k Rollover Basics

Transferring your existing 401k, 403b, 457 or other retirement plan

from your previous employer into an Individual Retirement Account (IRA).
A 401k rollover occurs when you no longer work for an employer and you elect to transfer or 'rollover' your retirement plan (such as a 401k, 403b or 457) into an IRA. This process is most often referred to as a '401k Rollover' or 'IRA Rollover.' There is no limitation on the dollar amount you can rollover from your previous employer's retirement plan. Most investors rollover their money into a Traditional IRA because there is no tax liability.
When you leave your employer, you will need to decide what do to with the money you have accumulated in your employer's 401k, 403b, 457 or other retirement plan. You are entitled to the full vested amount in your retirement account. Protecting your retirement savings from steep taxes and penalties by rolling over your 401(k) into an IRA, may be the right choice for you. Consider the following options to make an informed decision:
Take the money out in Cash:
For most investors this is the worst option, because taking a distribution in cash has very serious tax consequences. Your previous employer is required to withhold 20% of any distribution for federal taxes. The cash that you receive will be taxed as ordinary income. The 20% that is withheld will be used to pay the taxes you owe for your federal taxes. However, depending on your tax bracket you may owe more than the 20% that was withheld when you do your taxes for that year. In addition, you are likely to be penalized 10% if you are younger than age 59 1/2.
Positives
- You get immediate access to your cash.
- You can use the money for any purpose, including other investments.
Negatives
- 20% of your value will be withheld for federal taxes.
- If you are under 59 1/2, you are responsible for an additional 10% in early termination penalties.
Leave the money with your previous employer's retirement plan:
This is a much better decision than taking cash, since you will not be penalized or taxed. However, many investors find they have less options with their retirement account and that they are more difficult to manage, once they leave their previous employer. Generally, loans previously taken are required to be repaid upon termination and no further loans are available after termination.
Positives
- No taxes are due until you begin taking money out.
Negatives
- Your investment options may be limited.
- Your access to your account may be limited.
Transfer the money into your new employer's retirement plan:
Most employers allow you to do a transfer into their retirement plan. Compared to keeping your money with your previous employer's plan this avoids the potential problems of properly managing your investments and losing plan options. However, you are again limited to a small basket of proprietary funds and/or company stock. Additionally, most plans impose lengthy wait periods during which your money is not invested and not earning interest for you.
Positives
- No taxes are due until you begin taking money out.
Negatives
- You must change investments to those offered through your new employer's plan.
- Your new employer may have a waiting period.
Transfer the money into an IRA (401k Rollover):
For many investors, a 401k Rollover into an IRA is the best option for the money they have saved in their previous employer's retirement plan. You generally get increased control, greater organization, improved investment flexibility and investment advice, that you would otherwise not get in a 401(k) plan.
Positives
- No taxes are due until you begin taking money out.
- You may have access to more investment choices.
- You may be able to combine your rollover with other retirement money.
Negatives
- You may have to change investments from previous funds or stock.
- You cannot borrow money from an IRA.
When leaving an employer, many experts believe, it is advantageous to rollover your retirement plan into an IRA versus leaving your money in your old employer's retirement plan or transferring it into your new employer's plan. To understand the actual process of rolling over your money, click here.
What will my rollover be worth?
Current Age:
Retirement Age:
Rate of Return(%):
401(k) Balance($):
Calculate
If I cash out now:
I'll pay penalties of:
...
I'll pay taxes of:
...
Total penalties + taxes:
...
I'll have this much left:
...
If I roll over instead:
It will be worth this much at retirement:
...
This calculator is intended for demonstration purposes only. It assumes a tax rate of 20% and IRS penalties of 10%. The Wilshire 5000 Index (a very good representation of the entire stock market) has produced a return of 10.59% over the past 10 years. You can begin taking distributions from your IRA without penalties at age 59 1/2.
Copyright © 1999-2010, SaveDaily.com, Inc.