- Withdrawing funds from retirement plans often incites taxation and penalties. Rollovers are generally preferred.Robert Kirk/Photodisc/Getty Images
401(k) plans provide several advantages to their users. The employee-match aspect of these plans can greatly increase the potential for retirement savings, and the tax-deferred status of the programs enable significant appreciation of these assets before they are distributed to the retiree. However, 401(k) plans are administered by employers, and when an employee is separated from the company, withdrawing the funds can undo many of the advantages 401(k) plans offer. - The solution to this problem is called a rollover. If you leave a company in which you participated in a 401(k) plan for a new employer who also offers such a plan, you will usually have the option of consolidating them. Because 401(k) plans are administered by individual companies and can vary considerably in their management and restrictions, your best course of action is to speak to the administrators of your former and current employers. Each administrator will be familiar with the specific rules of his plan and will be able to coordinate a rollover. For example, if your former employer presented options like purchase of the company's stock intrinsic to participation in the 401(k) plan, then the stock may be transferable or it may have to be liquidated.
- Individual retirement accounts offer many of the advantages of 401(k) plans. One similarity is that individual retirement accounts are funded with pre-tax dollars. Any contributions you make to one of these accounts is not counted as earned income in the year that it was earned and contributed. Because of this similarity in treatment, funds from the 401(k) plan can be transferred to an individual retirement account. Many financial firms, brokerages and even online brokerages offer individual retirement accounts. As it is in their interest to procure your business, they can be quite competitive and most will provide you with considerable assistance in contacting your old plan administrator and explaining the process both before and during the transfer.
- Annuities are another option for 401(k) rollover. Annuities are generally administered by insurance companies and are quite conservative investments regarding their expected return and the risk level of the instruments in which they invest. All annuities are not qualified plans, meaning that they receive special tax treatment. However an annuity that receives the funds from a 401(k) plan is a qualified plan and will confer tax advantages like those of the 401(k). The funds will not be taxed during or after the transfer from your old 401(k), and their subsequent growth will not be taxed; but, distributions made to you from the plan will be taxed. In all of these cases, remember to carefully consult with the administrators of your old plan and the target account to make sure the new account is ready to receive the funds. If the funds are not transferred directly, they may constitute a distribution to you, triggering penalties and taxes.
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