There is no doubt that the 401(k) program is a great vehicle for saving and accumulating a great deal of money, but it is essential to handle rollovers properly in order to avoid losing a big chunk of that money to penalties and taxes.
The most important thing to remember when changing jobs or dealing with a 401(k) distribution is that you must never actually touch the money. In order for the tax deferred nature of the 401(k) program to be preserved, the funds contained in the 401(k) must be transferred directly from one institution to another.
There are a number of ways to accomplish this goal. One of the most common methods of doing this transfer is to simply transfer the funds from one 401(k) plan to another. This transfer is often done in the event of a move to a new employer. If the new employer has a 401(k) plan for which the new employee is eligible, he or she may be able to simply roll the funds from the old employer’s 401(k) to the new one. The Human Resources director at the new employer should be familiar with this procedure, and he or she will be able to assist with the transaction.
Sometimes, however, the new employer either will not have a 401(k) program in place, or the new hire will not be eligible for the program right away. In that case there are a number of different options available. One option is to roll the proceeds of the 401(k) plan into an IRA. In this case, the company handling the IRA should be able to take care of the transfer. If you already have an IRA in place, be sure to contact the company holding the IRA and discuss the situation. Their representative should be able to provide the paperwork and help the transfer go smoothly.
One option that may or may not be available is to simply leave the 401(k) balance where it is. Many workers who have been happy with the performance of their 401(k) may wish to leave the balance invested even after they leave the company. It is important to note that many companies will not provide this option, so it is important to check with the Human Resources department before considering this option. In addition, after you leave the company, you may lose touch with changes to the plan, changes to the investment options and other important information. Leaving a 401(k) with a former employer has its merits, but it can have its drawbacks as well.
Dealing with a 401(k) rollover can be complicated, but with a little foresight and some careful planning you can make sure your nest egg continues to grow uninterrupted.