401k Rollover

A 401k rollover is when you move your 401k into an IRA or other qualifying plan.  Many people decide that it is in their best interest to consolidate their accounts.  Why?  There are several good reasons.  Primarily - you may reduce your expenses.  There are many 401k and IRA’s that accrue high fees.  If your main objective were to grow your account to a point where you will eventually reap the rewards of your investments, you would not want to maintain several accounts that are separately and individually racking up charges against your potential earnings.

The first thought that comes to many people that recently parted ways with their employer is to cash out on their 401k to immediately have funds available.  That may not be the best decision.  If you are below 59 ½ years of age and opt out of a 401k rollover, you are probably going to get charged with penalties for withdrawing from the plan.  For example, if you have a traditional 401k you would be responsible to pay the taxes on the money that you invested into the plan and an additional ten percent fee for withdrawing early.  In some desperate conditions, the penalty may be waived or reduced.  However, this significant exception is not seen very often.

The next reason for consolidating your 401k rollover is for simplicity.  Managing several accounts at once can be confusing, difficult to manage and time consuming.  With a consolidated account, all of your investment activities can be monitored from one perspective.  This option may give you a better understanding of your financial condition and promote frequent updates to asset allocation.

Another important thing to consider regarding a 401k rollover is moving your consolidated accounts over to a third party.  In the event that there are changes to your previous employers’ situation that would not be a benefit for your investment portfolio, your financial advisor can give you advice about these changes.  The consensus amongst professional financial advisors is to keep the funds invested in a retirement plan and let the account grow.  The alternative option is to put the money into a mutual fund or a brokerage account, which, you will have to pay capital gain taxes on.  Clearly, the best option in this case is to keep the funds in a retirement plan, watch the account grow, and invest in other options later in life to reduce the amount of taxable gain on the investment.