401k Rollovers

Employees can apply for a 401k rollover to IRA account without losing contributions, accrued benefits, or tax advantages upon termination of employment. They say you can't take it with you, but a 401k rollover is designed to follow employees just about everywhere they go. Funds deposited into a 401k, a defined contribution plan, are 100% vested and cannot be forfeited due to a termination of employment. Accrued benefits transfer to the worker's next place of employment, provided the more recent employer has an existing 401k or Individual Retirement Account (IRA) in place. Former employees may take a lump sum payment at termination or choose to roll over assets into an existing 401k rollover or IRA rollover account at the new job. But a 401k rollover or IRA rollover account can only be made to companies which provide tax-deferred Individual Retirement plans . Some workers who opt for lump sum payments purchase annuities which provide monthly stipends for the rest of their life. But, funds not deposited into an IRA may incur penalties if the employee is under the age of 59 1/2.

Traditional 401k retirement plans allow employees to make payroll deducted contributions before taxes. Employers can match these contributions dollar for dollar, or pay a certain percentage of employee salaries into the plan. All contributions are held in trust and invested in money market accounts, stocks and bonds. Dividends are distributed amongst employer and employees upon retirement, or when employees decide to leave the company. If assets total less than $5,000, workers may qualify for immediate disbursement. However, individual assets over $1,000 must be rolled over into an Individual Retirement Account (IRA) chosen by the plan administrator or trustee.

An IRA rollover account is set up through a bank or mutual fund company, which includes tax-deferred personal savings, limited to a certain amount each year. IRAs allow individuals to deposit up to $5,000 annually (for individuals age 50 and over), tax-free until withdrawn after the age of 59 1/2. Monies withdrawn prior to age 59 1/2 are subject to a 10% penalty for early withdrawal and of course, subject to federal and state income taxes. Employees who opt for a 401k rollover to IRA protect assets without incurring penalties. However, monies cannot be combined with existing IRA savings deposits. Like a traditional 401k, funds deposited into an IRA rollover account are held in trust and invested in stocks, bonds, mutual funds, and other ventures. The goal of the IRA trustee is to improve the account holder's potential to diversify stock portfolios and gain profits, thus building a tax-free nest egg for retirement.

Employees considering termination should consult with the current employer's plan administrator prior to resigning to learn about benefits and procedures for requesting and obtaining distributions. The Bible admonishes in Proverbs 4:7: "Wisdom is the principal thing; therefore get wisdom: and with all thy getting get understanding." It is wise to weigh all the options and potential outcomes before resigning, especially when benefits may be jeopardized. Retirement plan monies may not be immediately available upon termination; and employees may need to delay leaving employment to reap the greatest benefits. Blackout periods may curtail asset payments or temporarily prevent a 401k roller to IRA from being opened. Black out periods call a halt to account activity, usually for three consecutive business days, when assets are being audited, plans are altered, or recordkeeping must be updated.

In the event that an employee decides to leave the company, a 30-day notice to the plan administrator should be sufficient to ensure that monies are available. If employees opt to leave retirement assets in place with a former employer, the plan administrator should be given current and updated employer contact information. Workers should also maintain contact with former employers and make sure that the Human Resources department or plan administrator forwards an annual Individual Benefits Statement (IBS). The IBS will include total vested pension benefits and an updated performance of investments showing net gains or losses. At the end of the tax year, terminated employees whose benefits were transferred from the original 401k to a 401k rollover to IRA should receive a 1099-R reporting distributions from the former retirement plan. The Summary Plan Description (SDP) will also include detailed information regarding employee rights to benefits.

Retirement plan benefits can take up to 2 months after the end of the plan year to be distributed to qualified employees. But 401k rollovers allow employees to receive assets upon termination or in the event of hardship. Employees may be tempted to spend monies distributed in lump sum payments, but the danger is in coming up short at retirement. If assets have accumulated over 10 years or more, it's a wise to deposit funds into a 401k rollover to IRA at the next job. In a case of hardship, it may be a better idea to borrow money, or take out a second home mortgage, rather than jeopardize retirement funds that are not so easily replaced. Employees who begin working for new employers should consult with new plan administrators and human resources directors to get a clear understanding of benefits and investments under the new 401k rollover to IRA account. Plan administrators should ensure that new hires receive a Summary Plan Description outlining details of the new employer's retirement plan. New hires cannot assume that the new SPD will be like the old employer's plan. Taking time to go over the SPD and get a comprehensive idea about benefits, employer matching funds, and potential investment opportunities will put new employees right back on the path to financially free retirement.