With qualified retirement plans such as 401(k)s, you can take your retirement savings with you when you leave your job. Whether you leave your employer to change jobs or take time out of the workforce, you can gain greater control of your funds through the rollover of your old 401(k) into an Individual Retirement Account (IRA).
Know your options
When you leave a job, there are four options for your retirement plan account. You can:
- Keep your money in the current plan if your employer allows it (some don't, especially for accounts with low balances).
- Move it to your new employer's retirement plan (if available).
- Roll it over into an IRA account.
- Take the cash. You may want to consult with your tax adviser before doing it. By taking the cash, you may have to pay tax on the distribution, including a 10 percent tax penalty if you are younger than age 55, and it may reduce your retirement savings.
If you leave your money in your current employer's plan or move it to a new employer plan, you will be limited to the rules of that plan and the options they offer. You can generally withdraw funds without a 10% early withdrawal penalty from a 401(k) if you leave your employer at age 55 or older. With an IRA you generally have to wait until you are age 59 1/2 to withdraw funds in order to avoid a 10% early withdrawal penalty. Plus, you'll no longer be able to make contributions or take a loan, in most cases. And you may have to pay extra service or administrative fees, along with the possibility of having transaction limits imposed.
Depending on your circumstances, then keeping the funds there might be a good idea.
Rollover to an IRA can mean tax-deferred growth
A rollover allows you to take your retirement distribution and move it to any institution offering IRA accounts, such as State Farm®. Your account continues to grow tax-deferred, while you retain control and flexibility with your money.
You may have a wide choice of investment options, including choices that employers might not offer, such as mutual funds, annuities and bank CDs. And you can simplify your financial life by moving the account to a company where you already have funds or even into an existing IRA.
When rolling over a 401(k) into an IRA it's important to do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees, and any potential penalties.