After years of saving for your retirement through your company’s 401k plan, a change in employment can easily leave you confused regarding your retirement funds. There are a number of different options that you can take to transfer your existing 401k account. Exploring the different options is essential to determining the strategy that is right for you.
The first option you have with your 401k is to simply continue with your existing plan. Some plans will allow you to continue the management of your 401k with the current plan administrator. This option may only be available depending upon the conditions of your departure from the company.
Another option is to transfer the existing 401k account into another 401k account. If you are changing jobs, you will have the option to transfer your existing plan into your new plan. This type of arrangement may be suitable if the new retirement plan has favorable options that meet your needs.
A third option is to rollover your 401k into a traditional IRA account. This option has picked up in popularity the past couple of years. The more familiar people have become with this option, the easier the process to transfer the account over has become. New legislation has also been introduced that makes the process much easier for the plan participant.
A 401k rollover to traditional individual retirement arrangement offers the individual a number of favorable advantages. This type of transfer not only has significant tax advantages, but it also allows you greater flexibility and control over your hard-earned money.
The most recent option you have with your existing 401k plan is to rollover into a Roth IRA. Previously there was no direct 401k to Roth IRA options, but in very recent years, new legislation has been released to allow this type of transfer.
Similar to a traditional IRA rollover, the Roth IRA rollover provides many unique advantages. The most significant of which is the tax advantages of a Roth IRA account. A Roth is designed to allow tax-free distributions out of the account and does not have the same required minimum distribution restrictions as other retirement accounts.
Transfers into a Roth IRA are taxable to an extent upon the transfer date and are based upon a specific formula. Because the funds in your 401k have been added with pre-tax dollars, a portion of your transfer will been taxable. The IRS is not going to allow your funds to get off completely tax free, though the tax benefits are still prevalent.
Transferring your 401k participation plan into another investment vehicle can be a stressful process. Knowing your options can provide you peace of mind and greatly increase the overall stability and safety of your retirement funds.