401(k) Rollovers
by Ellise Walsh

One of the biggest financial changes to take place in the past 20 years is the decline of the traditional defined benefit pension plan and the ascendancy of employer sponsored 401(k) plans. The 401(k) plan was created to help employees take charge of their own retirement planning, and when used properly they can be extraordinarily effective at providing workers with a comfortable lifestyle when they retire.

With this opportunity comes responsibility and, unfortunately, some challenges. One of the biggest challenges is how to handle your 401(k) rollover when you change employers. With the average worker now working for at least 4 or 5 different employers during his or her career, this is a challenge most people will face at least once in their working life.

The options you have when you change employers will vary from company to company. Some companies will allow you to leave your 401(k) invested in their funds even after you have moved on. Other companies will require you to take your 401(k) funds with you when you leave. Likewise, the company you are going to may allow you to move your 401(k) funds to their plan right away, however, other companies will not do this as there is often a waiting period before you become eligible to join the 401(k) program at your new company.

If your old company will allow you to leave your 401(k) plan invested with them, you should make the decision on whether or not to leave the funds there based on the level of performance you have seen while your money has been invested. If you are satisfied with the performance you have received throughout the years, you may want to leave the money invested as it is. If you do so, however, it is important to continue to monitor the performance and move the funds if performance drops off. It is easy to lose track of a 401(k) at a former employer so you want to make sure to check the performance at least once of twice a year to make sure it is still acceptable.

Convenience is another factor to consider when deciding whether to move your 401(k) or leave it as it is. Many people like to have all their financial assets in one place to make it easier to manage. This decision is entirely up to you.

If you do decide to move your 401(k), you will need to roll the money over into an individual retirement account, or IRA. If you already have an IRA established with a bank, brokerage firm or mutual fund company, you can arrange for your employer to move the funds directly into that account. If you do not already have an IRA account established, your employer, or the company handling their 401(k) plan, can help you establish an account in which to place your 401(k) proceeds.

It is vitally important that you not touch the money in your 401(k) account during the 401(k) rollover. If you take possession of the money, you will be subject to a 20% tax penalty plus regular withholding. If you make a mistake during the 401(k) rollover process, it can be very difficult to straighten out with the IRS. It is important that the 401(k) rollover be strictly a custodian to custodian event. The money simply transfers from its present 401(k) custodian to the custodian of your choice for the IRA account.

Handling a 401(k) rollover can be a daunting task, but it is an important one as well. Your 401(k) is likely to be your biggest asset when you retire, and taking the time to handle it properly will pay big dividends after you have stopped working and moved into retirement mode. Take the time to educate yourself about the implications of 401(k) rollovers, and you will be able to handle such moves with confidence.

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