Why?  Simply put, because as great as the 401K idea is, it can limit your choices significantly.  You might not be able to get the best possible investments out there.

Think about it – if you worked for a reasonably large company, then while you were employed, you probably didn’t feel like you had much say in the investments that were offered to you and your fellow employees.  Technically, the benefits director is supposed to take into account all employees opinions, but that doesn’t mean that a given opinion makes sense or that any change will happen.

Also, contrary to what many people think, your 401K isn’t free.  It costs money to be invested in the choices made available to you through your company plan.  Big 401K providers don’t do this out of the goodness of their hearts, after all!  In fact, in 2009 Senators Tom Harkin (D-IA) and Herb Kohl (D-WI) introduced and had passed the Defined Contribution Fee Disclosure Act of 2009 to force companies to disclose these fees among other things.

Another thing you don’t have with your company 401K is personalized investment advice tailored to meet your goals.  For this reason, one of the other things that the Disclosure Act is requiring (and which many companies have already added because their fund provider knew this was coming) are the so-called “target date” funds, one example being the Fidelity Freedom 2040 fund.  Funds of this nature are provided in company 401Ks primarily for the legal cover that they provide.

Here’s how that works: you work for Company XYZ and invest in their 401K.  You’re an engineer, or an accountant, or a truck driver, not a financial planner.  You don’t research these things all day because you have other things to do.  Consequently, you don’t know what to invest in, so you say, “I’m 35 years old, so I’ll probably retire in about the year 2040, so I’ll just invest in that one.”  You’re covered in theory because these target date funds have an obligation to be focused initially in a relatively aggressive way, getting more and more conservative the closer it gets to 2040, which is pretty standard in the investment world.  Generally speaking, you want to grow while you’re younger and get more protective as you get older and closer to retirement.

The problem is that this approach doesn’t take into account your individual goals and purposes.  It’s a generic solution for those that aren’t interested or don’t have the time, and many investment professionals are concerned that the performance that they offer might be subpar to other choices.

So what does all this mean?  Should you roll over?  Absolutely you should, because you gain individual control over what you’re invested in, in addition to getting professional advice, and it doesn’t cost you a dime in taxes if you do it right.

When you roll over your funds with someone like myself, the whole world of investing opens up to you for those funds.  The IRS doesn’t care what you invest in, only that you pay the right amount of taxes, which is another thing we’ll discuss.

Want to know more?  Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: 401K, Convert My IRA, IRA Conversion, recovering economy, unemployment

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401(K) rollovers are considered an IRA account, technically. They are both investment accounts set up for retirement. However an IRA account can be set up outside your employment, and could be invested in many more types of investment vehicles than a 401(K). Contributions to both a 401(K) and IRA are made before tax, and you pay taxes instead on the money you withdraw when you are retired. You can do a 401k withdrawal and also an IRA withdrawal both before and after retirement age, but if you withdraw before you reach the statutory age limit, there can be penalties and taxes due and owing. They also both have contribution limits, although in a 401(K) you can contribute more than to a traditional IRA account. Confused yet?

When you leave your employer, you have the option to leave the 401(K) behind with the employer’s fund manager, or you can instead do what’s known as roll over your 401(K) to a new brokerage. Your rollover account is often referred to by brokers as “rollover IRA”, because once you roll over into a new account, the new account is not technically a 401(K) account any longer. This instead is a traditional IRA to which you have moved your 401K() fund balances.

A 401k rollover to IRA can benefit you, because the rules get relaxed on the new account. You are not prevented from withdrawing money, as you might have been at your old job. You will still be responsible for paying the taxes and penalties, which can be substantial at nearly 40% of the withdrawal amount; for that reason a 401k withdrawal is never recommended except for emergencies, or if you qualify for an exception such as paying for college (you will still owe taxes). But when you rollover your account, you can now invest as you see fit, and are not limited to the investments your employer has chosen for you. You can also invest your 401k in cash vehicles such as U.S. Treasury notes or T-bills, or money market funds and CDs. The choice is now yours, not your employer’s.

One other reason to roll over is that you can convert into a Roth IRA account when you roll over your 401k. Money you invest in a Roth IRA is invested with after tax dollars, but when you retire, you pay no taxes on the money you take out. This can be a significant savings – you could pay less by paying taxes today instead of in the future when the value of your account has grown. When you covert from a tax-deferred account into a Roth however, you will owe taxes on the money you previously invested with a tax-deferral, so check with your fund manager for conversion details. Right now, there are regulations which allow you to pay the taxes owed over time, so it’s not such a big hit all at once.

Taking your 401k rollover to an IRA makes sense on a number of levels. By moving your retirement funds today, you can gain control over your financial future and improve your returns.

Technorati Tags: Financial Ideas, Investing strategy, Retirement

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