What Is A Rollover?

With such qualified retirement plans as 401(k)s, you can take your retirement savings with you when you leave your job. Whether you leave your employer to retire, change jobs, or take time out of the workforce, you can gain control of your funds through a rollover.

Know Your Options

When you leave your job, there are four options for your retirement plan. You can keep your money in the current plan if the employer allows it (some don’t, especially for accounts with low balances), move it to your new employer’s retirement plan, roll it over into an IRA account, or take the cash. The latter is generally the least preferable because you will have to pay tax on the distribution, including a 10 percent tax penalty if you are younger than age 59½, and it will reduce your retirement savings. It’s tempting to tap into that money, especially if you are leaving your job involuntarily, but you should avoid that if possible.

If you leave your money in your current employer’s plan or move it to a new employer plan, then you are limited to the rules of the plan and the account options that they offer to their employees. If the offerings appeal to you and you don’t find the rules restricting, then keeping the funds there might be a good idea. But what if you do research or talk to a financial advisor and find out the offerings and rules are not right for your situation?

Traditional IRAs Allow Tax-Free Growth

A rollover allows you to take your retirement distribution and move it into a Traditional IRA account at any institution offering an IRA. Your account continues to grow tax-free. You have a wide choice of investment options, including choices that employers might not offer, such as mutual funds, annuities, and bank CDs. You can simplify your financial life by moving the account to a company where you already have funds or even into an existing IRA.

With a rollover IRA, you retain control and flexibility with your money. If you decide to move the funds to an employer plan in the future, you can do that. If you want to change the investment option to reflect changes in your life, you can do that, too.

The process is simple. Once you identify the investments that you want to move the funds into, you fill out the application form. The company that administers your new account will contact your employer and arrange for a rollover, saving you the hassle of making the calls or dealing with the funds yourself.