What is a 401k Roll Over?

401k Rollover is a term that has been widely used to explain a common scenario. When someone has a 401k retirement account and if he/she wants to transfer (”rollover”) the plan into an IRA (individual Retirement Account), then it is called 401k rollover. This retirement plan transition has many combination’s and methods of executing, but all that are commonly called ‘401k rollover’. This scenario is also known as ‘IRA Rollover’.

There are many reasons for 401k rollover to take place. Typically, when someone changes the employers or when he/she goes on retirement, and requires better control over their retirement accounts, 401k rollover comes into play. If you have a 401k retirement plan, then you can decide between three options; taking the money out with possible taxes and penalties, keeping the money with the employer, and initiating a rollover to a new IRA.

Some people make the grave mistake of identifying IRA accounts as an investment. When it comes to IRA account itself, it is not an investment. Rather, it holds investments such as stocks, mutual funds, maturities etc. on behalf of you.

There are thousands of 401k rollovers taking place every month and people really choose IRA accounts as their way of controlling the retirement due to many reasons. First of all, compared to 401k, IRA offers many tax benefits. IRA funds are usually tax differed funds.

When a 401k rollover takes places, you will be taxed and forced to pay penalties depending on the method chosen for rollover. If your decide to cash out your 401k, then your employer will keep 20% of the funds for Federal and State tax requirements and you will be fined 10% of the funds as premature withdrawal penalty. If you choose to let your employer to directly send the funds to your IRA brokerage company, then there won’t be any taxes or penalties. If you are not in a hurry to cash out your retirement fund (which is the good way to go about this), then you should be choosing the latter method of 401k rollover. For determining the options of this method, you can obtain a free rollover kit from us.

In case if you prefer to play a little with your retirement funds, then there is a third method. You can cash out the 401k funds and then deposit it within 60 days into an IRA account. Within 60 days, you can do whatever you like with the money, but it should be there in your IRA account by the end of 60 days period. If you fail this, the full amount will be taxed as if you cashed it all out. If you manage to deposit a portion of the money, then the rest of the money will be taxed and fined as described in the first method.

Get FREE 401K to IRA Rollover Forms here.