401K Rollover Options

401K Rollover Options

401K Rollover Options

One of the most complex tools in the realm of investment and planning for retirement is the 401k. Likewise, one of the most complicated questions surrounding the 401k is whether or not to roll over your 401k investment.

There is no easy answer to this question, and each investor must consider his or her situation carefully before making a choice.

Because a 401k rollover is a tough topic, it is very important to retain the assistance of qualified financial experts. However, is important not to be misled by any organization that claims 401k rollover is too sophisticated or difficult to understand.

The ultimate decision about a 401k rollover must be made by the investor, backed by the full confidence of the best available advice.

This brief overview is an introduction to 401k rollover and other 401k options an investor is presented with when nearing retirement .

What is 401k Rollover?

Millions of people all around the United States retire each year. When they retire, they are faced with a fundamental question about their retirement investment: Whether to roll their 401k over into an Individual Retirement Account, also known as an IRA.

In many cases, this is an appropriate and sound choice that can be a valuable part of a long-term financial plan. However, this is not always the best approach. When an investor stops working, he or she is faced with several different options in relation to any existing 401k investment.

The investment itself is associated with the employer, so any change in work status should lead to an important period of reflection on the part of the investor. However, it is even more critical to think carefully when the time for retirement comes around.

There are four basic paths that an investor can take in determining the status of their 401k. Depending on the specifics of an investor’s goals and financial health, any of these may be the right move - but it is crucial to understand the pros and cons of each one.

These options are:

1. Roll the investment over into a self-directed Individual Retirement Account (IRA).
2. Leave the money in the plan.
3. Roll the investment over into the 401k plan sponsored by the investor’s next employer.
4. Take a distribution of the funds in the 401k in the form of a single, “lump sum” payment.

Option 1: The IRA Rollover and Its Benefits

There are many attractive aspects to an IRA that may prompt investors to choose a rollover. When it comes to the overall portfolio of investment options available, the 401k plan may be somewhat limited. These are some of the restrictions that have typically been built into the plans:

- Many 401k plans offer only a handful of potential investment options to choose from.
- In some instances, companies have been known to heavily favor their own stock in the 401k.
- Insurance protection for assets underlying the 401k plan can result in a major cost up to 3%.

For these reasons and more, some investors are actually eager to go through with the rollover and move to an IRA. The IRA provides the investor with the opportunity to explore many kinds of securities not available under a 401k.

IRA holders have the opportunity to choose from:

- CDs
- Mutual funds
- Commodities and alternative investment plans
- Annuities
- Mutual funds

What Other Benefits Might Be Available With An IRA?

Extended Credit, Debt & Bankruptcy Protection: For the average investor, the entire value of the IRA may be exempt from creditors, although this protection usually extends only as far as the first million dollars.

Consolidation: IRAs provide the versatility to heavily consolidate multiple retirement accounts into the single IRA account, which can provide a great deal of asset shielding if creditors are an issue.

Flexibility: When rolling a 401k directly into a Roth IRA, investors may also receive the flexibility to avoid Required Minimum Distributions at age 70.5.

Payouts: Many IRAs provide for the investor to withdraw any amount at any time, unlike most 401k plans.

Inheritance: Heirs may find that they have an easier time securing distributions from an inherited IRA than they would with other types of plans.

IRAs are usually considered attractive investments. Investment firms are known to compete heavily for the assets at stake in a rollover situation, and may offer large cash incentives in order to attract customers. This is one reason why impartial advice is critical when it comes time to consider the rollover option. Although it works well in many cases, there are situations where the rollover may be detrimental to an investor.

Option 2: Leaving Money in a 401k After Retirement

Even when you are no longer working, you still have the opportunity to keep your funds in a 401k if you choose - and this may turn out to be the best option, especially in the short term. There are many situations in which it might be a good idea to retain the 401k despite the limitations of such a plan. For example, some investors find their 401k is providing a return well in excess of market predictions.

If a 401k investment is doing well, then the freedom associated with an IRA might look more like uncertainty even to a seasoned investor. To avoid this kind of uncertainty and still gain a few of the benefits associated with the IRA, some investors can draw on their 401k funds in the form of a loan. Plus, remember that the money held in a 401k fund cannot be attached except by the Internal Revenue Service, providing some level of protection in the event of bankruptcy.

Option 3: Moving 401k Funds Into Another Employer’s Plan

If a retiree chooses to rejoin the workforce, they may have the opportunity to align their 401k investment with the 401k plan provided by that employer. Although this does provide an investor with the retirement account consolidation that a 401k can provide, this can be risky or ill-advised depending on the structure of the new company’s 401k plan.

Option 4: Taking 401k Funds as a Lump Sum

It is almost never advisable to go this route - of plan funds will automatically be withheld from any lump sum payment. The remaining balance will be taxed in its entirety as income all at once, which can often land investors in a higher tax bracket than they would be in otherwise.


The decision of whether or not to roll a 401k into an IRA is a serious one. With the help of our licensed financial advisors, you will have the opportunity to get impartial expert advice that can help you make the right decisions for your unique situation. To find out more, consider our free, no-obligation 401k evaluation.