401k Rollovers

Are you leaving your employer soon to retire or change jobs? If so, there are some financial decisions to consider with regard to your companys retirement plan. Many people receive sizable lump sum payments from their 401K or other retirement plans when they leave their employer. This may be the biggest check you"ll ever see in your life. What you do with this money could save you - or cost you - thousands of critical retirement dollars. Can you leave it in your employers plan? What are some reasons for considering this option? Plan assets such as 401ks may be protected from creditors. If you roll your assets over to an IRA, they arent federally protected, although most states offer limited or full creditor protection for IRAs. You also may feel comfortable with the investment options offered in the plan, although you still wont have the full flexibility afforded in an IRA as far as investments are concerned. What about taking money out of the plan before 59 ½? It may be possible to withdraw money from your employers plan for retirement before 59 ½ without an early withdrawal penalty. Generally, you cant take withdrawals without penalties from IRAs, although there are provisions for this as long as the distributions fit certain guidelines. I would recommend meeting with your financial advisor and account before pursuing this option. What if the plan makes a distribution directly to you because it doesnt allow you to leave money in it once you leave the company? You dont want this, as they have to withhold 20% for taxes. This is a situation where you want to control the tax payments and not have the entire distribution paid at once. While you can still roll the money into an IRA within 60 days, it may be difficult to come up with the money that was withheld in order to avoid tax on it as a distribution and then you have to wait to get it back until you file your next tax return. Can you roll the money in your plan into your new employers plan? Most times this is a possibility. You would want to check with your new plan and make sure it gets done directly from your old plan to your new plan, not to a check made out to you! What are the advantages of a rollover to an IRA? This is often the best choice. First of all, you will have more investment options and control over how the money is invested. You can use mutual funds, individual stocks or bonds, CDs, money markets... Second, you will still be able to roll the money into a new employers plan as long as you dont commingle it with your own IRA contributions. Third, you may want to consider a Roth conversion at some point, and the money must be in an IRA before a conversion takes place. Taxes would be paid on the amount converted, but then would grow tax free. You can even convert partial amounts if you want. Finally, there may be more flexibility in how your beneficiary can structure distributions after your death.