If you are planning on leaving your job, or you have already left, then you may be wondering what to do with your employer sponsored 401k plan. Fortunately, when you leave your employer, you are entitled do what ever you would like with the funds in your employer sponsored plan.
Many people withdrawal the funds, therefore incurring unnecessary penalties and loss of capital. These losses can derail your retirement plans by costing you thousands of dollars. For most investors, the best option is to look into 401k to IRA rollovers.
401k To IRA Rollovers: Avoiding Fees And Penalties
This option to rollover your account is ideal due to your ability to transfer your 401k funds to an IRA without incurring any costly penalties or taxes. Keep in mind that 401ks and other similar retirement accounts grow tax-deferred and are funded with pre-tax dollars.
When you take an early distribution of the funds in your 401k, the IRS taxes you on the entire amount of the withdrawal, and can also impose an additional 10% early withdrawal penalty if you withdrawal the funds before you turn 59½.
This is clearly a bad deal, and funds invested in a retirement account should only be withdrawn if there is a real emergency. Don’t take an unnecessary tax hit or pay outrageous fees simply because you do not know how to do 401k to IRA rollovers. Contact a professional financial adviser, such as an IRA rollover specialist at ETrade, to simplify the process, and save you money.
401k To IRA Rollovers: Convert To New Employer’s 401k Plan
If your new employer offers 401k plans, you may be wondering if it is good idea to rollover your funds from you former employer’s 401k plan to your current employer’s plan. It may be a good idea if the balance from your previous employer’s 401k is low.
It can be more difficult to diversify your investments with a low amount of capital if you are investing in a single mutual or index fund. In a 401k, you can spread your funds out no matter how much money you have to invest.
There are certain drawbacks to rolling over your 401k to a new 401k plan, in that there is considerably less control retained in this type of plan. As long as you are an employee of the corporation sponsoring the plan, you are subject to their terms and regulations on investments.
This results in being restricted to the investments offered by your company, and you will not be able to access your funds unless you take out a loan – if allowed – or you no longer work for the company. 401K plans may also have high fees, especially smaller employers.
401k To IRA Rollovers: Brokerage Accounts
You can also chose to rollover your 401k into a brokerage IRA. This is a common option, and many people chose to open an IRA at a discount online brokerage such as ETrade, because of their low fees and commissions on transactions.
These accounts also provide you with the maximum flexibility for investing, whereas in a 401k you are limited in your investment selections. The opportunity to invest in a broad assortment of asset classes is typically best for investors.
There are some considerations with utilizing this option, with the biggest being charged a fee with each trade placed. This is different than investing with a mutual fund where the expense ratio is built in. You may also be charged a transaction fee on a mutual fund trade with a brokerage account that would not otherwise be charged in a 401k.
These fees can be greatly discounted if you chose to use a broker that offers low or even no fees and commissions on trades such as Zecco.
There are many options available when considering 401k to IRA rollovers and only you and your financial adviser can decide what is right for you and your unique circumstances.