Changing jobs changes a number of elements in your life, from your salary to your job title to (sometimes) where you live. When confronting all these immediate changes at once, it is easy to discount the less immediate, but just as important matter of your 401(k) plan.

One option is to simply leave your money with your old company. This is not always allowed; if you have less than $5,000 invested, your company is allowed to kick you out of the plan. After all, if you’re not contributing to them as an employee and your money in the system is negligible at best, you’re taking from them without giving much to them.

But if you have more than $5,000 invested this is a viable option. It’s certainly the easiest, and appeals in an “if it ain’t broke, don’t fix it” sense. Your discontinued employment does not affect the quality of the 401(k) plan, so in some circumstances it may be best to just leave your money where it is.

However, there are some very real reasons not to do this. When you leave your retirement money with your former company, you are placing a lot of faith in that company. You’re effectively saying through your actions that while you do not want to (or are unable) to work for them anymore, they are still welcome to manage your financial future for you.

What’s more, you can’t predict the future. Your former company may be around tomorrow, the next day, and twenty years from now. On the other hand, it may not. Keeping your 401(k) money with an old employer spreads you quite financially thin. You’ll have too few eggs in too many baskets, which is a difficult situation to manage in the best of times.

Your new company will probably be loath to contribute to someone else’s 401(k) as well. So, if you want to take advantage of your new employer’s 401(k) matching funds or other perks, you’ll need to use their plan. Fast-forward ten years in the future, and instead of having a lot of money in one fund, you’ll have a little bit of money in two or more funds. Again, too few eggs in too few baskets.

Having said all this, it is important to note that leaving your 401(k) money in an old employer’s account is not without merit. It’s particularly effective as a temporary solution. As was mentioned above, changing jobs creates a lot of upheaval in your life. One way to curb this upheaval is to leave your 401(k) in one place until things calm down – just take care not to forget about it.

While rolling over to IRA seems to be the better option, there are certain things that you should consider before you make the move.

Retirement money means the world to a lot of people. This is why it has to be handled well. Rolling over your 401k to IRA is something that you should consider carefully, especially if you want to have the best possible outcome of it.

For starters, you have to consider the fees involved. If you’re looking at a rollover, be sure that the IRA would charge lower fees than the 401k plan of your new company. The IRA proposes a good deal if you get your IRA from a small to a medium scale business entity.

If in case you intend to invest your money, you might as well check out the rollover options you have on the 401k and compare it to that of the IRA. The IRA is most likely the winner here, especially if you want to invest on bonds, stocks, and mutual funds with your money.

There are some penalties involved with a 401k plan too. Be sure that you check into this matter before you do anything. Transferring a 401k to a new job or an IRA will incur charges that need to be considered well. If the charges and the penalties are worth it, then proceed with the rollover.

Consider the current standing of your company too. If you’re switching jobs, try to consider the 401k options and benefits of your previous employer with your new one and then to IRA. Some companies offer a comprehensive 401k plan to their employees. Make sure that you get the best possible deal at all times.

Try not to withdraw, make a loan out of, or even touch your retirement money so it can grow. If you don’t have a choice when it comes to this matter, may be because you’ve got more dues to pay right now than in the future, you might as well stick to a 401k so you won’t have to pay for the penalties and taxes when withdrawing.

Your retirement age is also something that you should consider. At what age would like to withdraw your money? With IRA, you have to be 60 years old to waive the fees and penalties. With a 401k, you can cash in as early as 55 years old.

Lastly, if you’re thinking of transferring most or part of the money to your heirs, the IRA offers a better deal with Stretch IRA account where you enjoy tax-deferred savings over an extended period of time. Whilst most 401k only allows for a spousal rollover, Stretch IRA is a great way to accumulate financial freedom for your heirs.

Related 401(k) Articles:

1. 401(k) Rollover to IRA

Kim Lankford from Kiplinger explains why 2010 is the year of the Roth for the American. Because, starting in 2010, anyone can convert their traditional IRA to Roth IRA, making a conversion possible for even higher income earners.

Unlike IRA, Roth IRAs are funded with after-tax dollars, therefore any amount you convert from IRA to Roth will be taxed in full upon conversion at the prevailing margin rate. But here’s the good news. You don’t have to pay the tax all at once, if the conversion is done in 2010. You can defer the taxes until 2011 and 2012 tax returns.

Watch the video and see if conversion to Roth IRA does make any sense at all.

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1. 401(k) Rollover to Roth IRA
2. Roth IRA vs Traditional IRA
3. What is a 401k Plan?

An IRA rollover occurs when you leave a job or reach age 59 ½, and as a result you are entitled to “rollover” your previous employer’s 401k plan to an IRA.

There are many reasons to rollover a 401k to an IRA. One of them is that IRA offers significant tax savings and greater opportunity to compound your money tax-free.

This rollover option also gives you maximum control of your investments and flexibility of choice since you are not limited to the investment options provided by your employer. You have absolute control of which company to invest your money with and you can base your decision on the types of funds, fee and track record of the company. With a traditional 401k, you have no control over those things.

However, before you initiate the move, it is important that you’re aware of the IRA rollover rules so as to avoid negative tax implications when performing an IRA rollover.

60-day Rollover vs Direct Rollover

Whenever you rollover your 401k plan to IRA, you will be issued a check for 80% of the account value of your 401k account and will have 60 days to deposit the money into an IRA. This is sometimes known as the 60-day rollover rule. However, you will still be expected to deposit the full 100% of your 401k account balance into the IRA plan.

For instance if you are rolling over a $100,000 account into an IRA, you will be given a check for $80,000 and expected to deposit $100,000 into your IRA plan with your own $20,000 (which will be reimbursed later when you do your taxes).

If you’re late, the money will be treated as a ordinary income and taxed at your current ordinary income tax rate. Plus, if you did not reach age 59.5 when the distribution occurred, it will be deemed as a taxable distribution and you’ll face a 10% penalty on the withdrawal.

Optionally, if you’re going to transfer your 401k into an IRA, authorize for direct rollover via a trustee-to-trustee transfer to avoid 20% automatic withholding penalty. In a direct 401k rollover scenario, there will be no taxes incurred even if you rollover maximum funds.

For this reason, a direct 401k rollover is really the safest, easiest and most convenient way to move your retirement funds.

Rollover or Transfer?

If you are simply moving your IRA from one financial institution to another (and you do not need to use the funds), then you should consider using the transfer method, instead of a rollover.

A transfer is a tax-free non-reportable movement of assets between retirement plans, and can be done for an unlimited number of times during any period. A rollover, on the other hand, leaves room for errors such as missing the 60-day deadline.

Whether you’re looking for higher returns or more investment selection, a 401k rollover to IRA is indeed a great way to maximize your retirement dollars; as long as you’re aware of the IRS rules regarding the rollover to IRA and their potential tax consequences.

When deciding between a Roth IRA vs Traditional IRA, you should first determine whether you think your taxes will be higher or lower in retirement (or what your expected income will be upon retirement).

If you believe your tax rate will go down in retirement, you’re probably better off contributing to a Traditional IRA. If, on the other hand, you think you’ll be in a higher tax bracket, converting to a Roth now may make more sense. In light of current huge budget deficits, chances are future tax rates will be higher than current ones.

Roth IRA Contribution Rules

Your eligibility to contribute to the Roth IRA is determined by your Adjusted Gross Income (AGI) and tax filing status. Here are the guidelines

Single Filer

• AGI up to $105,000 to qualify for a full contribution; *
• $105,000-$120,000 to be eligible for a partial contribution.
• $120,000 or more you’re not allowed to contribute to the Roth IRA.

Joint Filer

• AGI up to $167,000 to qualify for a full contribution;
• $167,000-$177,000 to be eligible for a partial contribution.
• $177,00 or more you’re not allowed to contribute to the Roth IRA.

Update: * The new Roth IRA conversion rules (for 2010) have lifted the previous $100,000 Modified Adjusted Gross Income for conversions from Traditional IRA to Roth, making a conversion possible for even higher income earners. Previously only singles and married couples earning less than $100,000 were able to convert.

Now there is no income limits for converting a Traditional IRA to a Roth IRA. And if the conversion is done in 2010, you can defer the taxes until 2011 and 2012. You can claim 50% of the taxes on the conversion in 2011 and the other 50% in 2012.  Note that this rule is only good for the 2010 tax year.

If you’re young and need a reason to invest in a Roth IRA, here’s a great article on why you need a Roth IRA by Erin Burt, Contributing Editor, Kiplinger.com.

Roth IRA Distribution Rules

Assuming your first contribution to Roth was at least 5 years before your first withdrawal (5 years holding period), Roth IRA distributions are completely tax and penalty free after you reach the age of 59 ½. The term distribution is essentially the same as “withdrawal” in this case, which occurs when you take money out of your retirement account.

Early withdrawals are subject to a 10% early withdrawal penalty, however, there are some exceptions to this rule. If you become disabled or use the proceeds to purchase your first home or pay qualified educational expenses, you are generally exempt from the 10% early withdrawal penalty.

However, unlike Traditional IRA, you’re allowed to withdraw your contributions at any time, tax free and without penalty while the same rule does not apply to earnings and dividends from your investment.

For example if your Roth IRA balance is $5,000 – made up of $3,500 in contributions and $1,500 in earnings, you would be permitted to withdraw ONLY $3,500 at any time without triggering any penalties or fees.

With greater tax advantage, Roth IRA is probably one of the best of 401k rollover options to maximize your investment dollars, but before you make any decision, you need to consider one fundamental issue – how close you are to retirement.

It’s pretty obvious that the older you are, the less sense it makes to rollover to Roth IRA. For someone in their 50s, he’ll have less time to make up for what he lost in taxes on the conversion. Make sense?

Related 401(k) Articles:

1. 401(k) Rollover to Roth IRA
2. Is a Roth Conversion Right for You?
3. What is a 401k Plan?

If you’re an employee, chances are you already know what a 401k plan is and how it works. Well, the principal idea of a 401k plan is to help eligible employees contribute a percentage of their salary as part of their retirement plan.

When you elect to make contribution to your 401(k) account, a percentage of your paycheck on each pay period is automatically deducted before it can be taxed and invested in the company-sponsored 401(k) plan, allowing it to compound tax-free until until retirement.

In the event you change employers, your savings can be transferred to another tax-deferred retirement account. It can either be rolled over into a new 401(k) account by the new employer or roll the money over to an IRA or possibly rollover to Roth IRA.

However, while traditional 401(k) plans have proven to benefit the employees in many aspects, the sad truth is that when it’s up to them to take action, many of them don’t – especially the rank-and-file employees who are finding it more difficult to contribute.

In such event, the best choice might be to opt for automatic 401(k) enrollment. Instead of requiring workers to sign up (and make investment choices), employees automatically have a portion of their paycheck set aside for retirement. This has also been an effective way for many employers to increase participation in their 401(k) plans.

What is An Automatic 401(k)?

Unlike traditional 401(k), an automatic 401(k) is simply a retirement plan – sometimes called an opt-out plan, that automatically allows workers to take part in the plan unless they actively opt out of automatic contribution.

In other words, you will NOT participate in the auto 401(k) if you decline. If you’re silent, or taking no action, then you’re considered a participant by default.

In short, the core notion of automatic 401(k) enrollment is designed to recognize the power of inertia in human behavior and enlist it to encourage saving, instead of hindering it. Eligible workers are assigned a default contribution rate, usually between 3% and 6% of pre-tax wages, and a default allocation of funds contributed to their retirement account.

Nonetheless, in spite of the apparent benefits in raising 401(k) participation rates (quite dramatically), automatic 401k plan hasn’t been implemented widely yet these days. To some critics, automatic enrollment makes workers less responsible for their retirement decision, thinking that it is already taken care of.

Related 401(k) Articles:

1. What is a 401k Plan?
2. 401(k) vs 403(b) Plan

While 401(k) is a widely understood retirement plan and most understand how it works, very few people have even heard of a 403(b) plan. One might easily think 403(b) retirement plans are similar to 401(k) plans. In theory, both are identical in many ways.

403(b) and 401(k) plans are both retirement plans that are supported by employers and both retains special tax treatment. But there’s a fundamental difference between 401(k) and 403(b) – your eligibility.

If you’re an employee in public schools and certain tax-exempt organizations such as schools and hospitals (as determined by Section 501(c)(3) of the IRC), you’re eligible for 403(b). Teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians and ministers are contributors to the plan.

The 401(k), on the other hand, covers private-sector employees. See what is a 401(k) plan.

Comparing 401(k) vs 403(b) Plans

Let’s take a look at how 403(b) plans are identical to 401(k) plans

1. Employees get immediate tax advantages, and free money matched by the employer.
2. Contribution limit reaches $15,000 (below 50 years old) or $5,000 up to $20,000 (over 50 years old).
3. Your retirement savings is forwarded to & managed by an authorized administrator.
4. The capital is allowed to compound tax-free until it’s taken as a distribution after you’re retired.
5. When you change job; retire; become disabled or die, both accounts can be rollover to IRA.

If you’re eligible for 401(k)

• You’ll ONLY have one investment plan that your company decides. Usually, the employer will decide which 401(k) plan provider and you have the one and only plan that is open to you. Freedom of choice isn’t a priority here.
• You’ll be qualified for a company match. A company matching contribution allows you to get some free money that equals to a half of your contribution up to 3% of annual total salary.
• You’re subject to ERISA (Employment Retirement Income Securities Act) strict legal requirements. This is the bitter part. Monitoring will be regularly conducted

How 403(b) differs from 401(k)

• Unlike 401(k), any employer’s contribution to the account can be withdrawn without penalty if it invested in an annuity. Since non-profit organizations do not pay taxes, these money is clear from tax liability.
• In several cases, you can evade ERISA requirements. No extra accounting and there is next to no administration costs.
• You’ll have more than one provider or vendor to choose from. Thus, you have more freedom of making a right choice for yourself and your money.
• Because you have more than one option, you can choose several vendors to manage your money. This way, you’re likely to reap potential gain or loss in spite of similar 403(b) benefits. One of the gains is quarterly rebalancing, which will rebalance your fluctuating portfolio value and could enhance your portfolio performance in the long run.

It is also worth noting that if you’re eligible for 403(b) plan, don’t assume that all employers will match your contribution. Most companies that offer a 403(b) retirement plan are not known for matching the contributions of their employees. If you’re unsure, it’s best to talk to them and figure out what your employer’s retirement plan is.

Related 401(k) Articles:

1. What is a 401k Plan?
2. Automatic 401(k) Enrollment vs Traditional 401(k)
3. 10 Tips to Make Most Out of Your 401k Plan

Here’s an awesome review of financial power of tax-free compounding of the IRA (Individual Retirement Planning) by Julio Negron of Kiplinger

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1. Is a Roth Conversion Right for You?

If you’re an employee, chances are you already know what a 401k plan is, but few of us actually completely understand what it is.

The principal idea of a 401k plan is to help employees save assets for retirement.

When you open up a 401k account a percentage of your paycheck is automatically deducted on each pay period before it can be taxed and put into a 401k plan, where it will be invested and diversified into stocks, bonds, and mutual funds.

401k plans have proven to be popular with employees for several reasons. Chief among them is the tax deferral where your money grows, untaxed, until you withdraw it in retirement. At that point, you pay taxes on your withdrawals at the regular income tax rate. Imagine what the power of tax-free compounding can do to your retirement income in say, 30 years down the road.

Others include the increased portability of this plan, which means you have the option to transfer your money from one account to another retirement account for better investment opportunity. We have discussed at length some of the options to rollover your 401k account.

And here’s the part that makes 401k irresistible, the free money (from your employer) by way of employer matching contributions. The employers often offer to match some or all of what you invest in your 401k (but are not required to do so).

It could either be a dollar for dollar contribution or $ .50 for $1 or whatever amount that employer might deem fit. For example if your employer matches $ .50 for every dollar you contribute, for every $1,000 you deposit, your employer will match it with an extra $500.

But don’t assume that all employers will match your contribution. If you’re unsure, talk to them and figure out your employer’s retirement plan.

Maximum Contribution Limit

There is a yearly maximum contribution that limits how much you can set aside into your 401k account, which changes every year due to inflation. Each individual employee can defer in 2010 up to $16,500 or 100% of compensation, whichever is less.

In general, you can contribute up to a maximum of 10% contribution of your salary before taxes are calculated. For instance if you are making $50,000 a year and you’re only allowed to contribute 10% of your paycheck, your maximum contribution limit is $5,000 a year, not the $16,500 contribution limit in 2010.

Early Withdrawal Rules

When you withdraw money from your 401k account, you have to pay the taxes on all money that you are withdrawing. Remember you don’t pay taxes on the money that is deposited so you must pay them when it is withdrawn.

In addition if you are under the age 59 ½ you will also have to pay a 10% penalty on your money as part of an early withdrawal fee. After all, a 401k plan should be treated as what it is – a long term retirement savings, so using it early goes against the whole idea.

What If You Leave the Company?

If you leave the company your 401k plan will continue to stay intact unless you roll it over to another tax-deferred retirement account.

There are many possible ways on how to rollover your 401k plan. Your money can either be rolled over into a new 401(k) account by the new employer or roll the money over to an IRA or possibly Roth IRA.

Related 401(k) Articles:

1. 10 Tips to Make Most Out of Your 401k Plan
2. 401(k) vs 403(b) Plan
3. Automatic 401(k) Enrollment vs Traditional 401(k)

If you are about to change your job, you need to decide on how to rollover your 401k. If your money is still in your previous employer’s 401k account, it is advisable to swap it into an account where you can manage and control rather than your previous employer making the decisions.

Rollover, as it explicitly implies, means reinvest our previous investment into a similar fund or security. In most job-related cases, rollover has something to do with moving your retirement money from your existing plan to another.

It could be from your 401(k) plan to your new employer’s 401(k) plan, from 401(k) to IRA, or from 401(k) to Roth IRA. Some exceptional cases would involve moving the money from IRA or Roth Ira to 401(k) plan.

Rule 1: Treat your savings as your last resort

We’ve might discovered or heard of some former fellow workers treat their savings as easy money, cash out and spend it like there’s no tomorrow. And that’s what we should NOT do. Well, the money is ours and we have full legal rights to spend it for whatever reasons sane people can think of.

But think again before cashing out your 401k. The last thing you’d want is to jeopardize your retirement plan. Unless we’re in such a REAL emergency (because some ‘emergencies’ are not really emergencies), no single dime should be tapped from our retirement savings.

The younger an employee is, the more he should stick to this rule. That’s because the young are the ones who actually can get the most out of the long run compounding capital. That said, it’s always wise to start building your retirement nest egg early.

Rule 2: Don’t leave your money behind

Many employees couldn’t care less about their 401(k) plans. They have left the plans untouched for years after they left the job. When an unforeseen emergency strikes, they need their money back badly. But the company they used to work for has either collapsed, gone bankrupt, merged with another corporation, or moved to somewhere else. What is worse, the workers didn’t leave any updated address to the plan administrator. Practically said, there’s no contact possible to make from both sides.

Does it sound like familiar to some of us? For employees, leaving the money to the old employer is far too risky. We’ll lose control over our own money. That’s why you must prioritize a precautionary measure, i.e. rollover as soon as you move out. Don’t put off till tomorrow what you can do today!

Rule 3: Opt for a direct rollover

Why do we have to choose driving on a longer, heavily congested highway rather than a shorter and wider freeway? That’s the analogy to two options when one can select from when requesting a rollover, i.e. direct rollover (electronic transfer) and payment within 60-day term.

Why so? Choosing the second means you risk missing the deadline and thus losing your money because if you’re late, the money will be deemed as a taxable distribution. If you can’t choose the first, ensure to have it made out to the agency of your choice.

When performing an IRA rollover, it is important that you’re aware of the rules of IRA rollover so as to avoid negative tax implications.

Rule 4: Make wise investment decision

When you have company stock in your account, don’t make hasty decision of selling all the investments in your account and invest in new investments provided by the next provider. Instead move the company stock “in-kind” into the new rollover account.

For a longer period, consider taking advantage of NUA (Net Unrealized Appreciation) by moving the stock in-kind to a taxable account. This way you’ll be able to take a lump-sum distribution of company stock and to pay the ordinary income taxes according to the stock’s cost basis, plus the 10% fines for those below 55 years.

Rule 5: Don’t go it alone

Get some professional help from financial advisor if necessary. Don’t take chances. They’re often more knowledgeable than you when it comes to the best possible ways to rollover & safeguard your retirement income.

Related 401(k) Articles:

1. IRA Rollover Rules