What Is A 401(k) Rollover?
It is very rare nowadays for most employees to stay at a company through the entirety of their career and into retirement. As a result it is common for many individuals who contributed to their company sponsored 401(k) plan to rollover there account into another 401(k) at a new organization or into an Individual Retirement Account. If the employee decides not to rollover their plan proceeds or the new employer does not participate in a company sponsored retirement plan then the individual can receive a cash out payment. Cashing out a 401(k) plan can have significant financial implications with regards to taxes and should be avoided if possible.
A best case scenario is leaving employment from one organization beginning employment at another both of which have employer-based 401(k) plans. In an event like this, it is very easy for the employee to have their 401(k) rollover from the old plan to a new plan which requires little effort on the employees part. A request is made and authorized and the money is rolled over in a straight transaction between the two 401(k) plans. The reason why this is the best option is that it requires next to no effort on the employees part and it is a seamless transition which avoids any unnecessary tax complications. Even if it is not a straight transfer and the old 401(k) plan cashes out the account and provides a check the employee still has 60 days to either deposit the check in a new 401(k) plan or Individual Retirement Account.
401(k) plans are meant specifically for retirement which is why they have a tax-deferred status and contributions can lower employees adjusted gross income. It is in the employee's best interests to maximize the returns on their 401(k) plan by picking investments that match their investment style and level of risk aversion. When transferring plans, thoroughly examine the 401(k) offerings by the new employer and if they are not in line with your investment style it may be more appropriate to deposit the proceeds in an IRA. Keep in mind that many employers offer matching contributions up to a certain percentage or total annual amount and if you go with an IRA you would be unable to receive this matching. The choice to be made is whether or not the matching is more beneficial than the additional options offered by a bank or brokerage IRA.
It is not always the case however that a former employee needs to roll over their 401(k) when they leave the company. Many large organizations with strong 401(k) plans will allow former employees to maintain their accounts as a sign of goodwill. Again much like the transition from a 401(k) into an IRA, whether or not you are able to leave your 401(k) with your former employer will depend on their willingness to absorb management fees as well as your willingness to lose out on the matching funds since you will no longer be a current employee. It will depend on how strong the investment options are from your former employer as the portfolio returns may be substantially more than any loss in additional matching.
A 401(k) rollover is a fairly straightforward process offered by all organizations. But as you learned there are a few options with regards to what is done with the proceeds so it makes sense to take time and evaluate all possible outcomes and choose the one which is the most beneficial. With most financial transactions it makes sense to ask lots of questions and read all documentation and this is true when conducting a 401(k) rollover. Sometimes rolling over 401(k) is the perfect opportunity to reevaluate your current situation and take advantage of options which may not have been available in the past.
