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:
- IRA Rollover Rules An IRA rollover occurs when you leave a job or reach age 59 ½, and...
2010 Contribution Limits
The 401(k) contribution limit for is $16,500 for those under 50 years old. For anyone between the ages of 50 and 59 ½ years old you also have the option of contributing an additional $5,500 as a catch-up contribution.The IRA contribution limit for is $5,000 for those under 50 years old, with a $1,000 catch-up contribution option for those between 50 and 59 ½ years old.