When it comes to the 401k retirement fund, many people have questions about how it operates, how and when you can access it, and other matters. Since many people start their 401k‘s under the auspices of their employer, one question in particular that many people have concerns the status of their 401k retirement fund when they leave or switch jobs. In this scenario, many people choose to transition their employer-sponsored 401k fund into an IRA (individual retirement account). Switching a 401k over to an IRA is called an indirect rollover.
If you’re moving on to a new job, congratulations. When you leave your old company, you’re going to be faced with the question of what to do with your 401k fund. You could take a check for the full amount, but if you do that before you reach retirement you’re going to be severely taxed and penalized for early withdrawal, and you’ll lose a lot of your 401k savings. You could also leave your 401k with your soon-to-be previous employer, or do a rollover into your new employer’s 401k program. Many people, however, like to do an indirect rollover, that takes the money from their previous employer’s 401k program and puts it into an IRA. An individual retirement account offers people almost all of the same benefits as a 401k, as well as more investment option flexibility. If you decide to do a rollover or an indirect rollover of your 401k, be sure to have a trustee do it so that you don’t get penalized for taking control of your money.
Rollovers and indirect rollovers can get complicated, so before you make a decision, be sure to consult with your financial adviser or a representative of your company’s human resources department.