Define 401k Rollover
One of the most important job benefits for the average worker is the option to commit money to tax-advantaged retirement accounts such as 401k plans. If you leave a job where you had saved money in a 401k plan, you have the option of or moving the funds to a new 401k plan offered by your new company or to an individual retirement account (IRA), also known as a rollover.
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Function
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401k rollovers function as a way for workers to keep their retirement investments in one place. If you elect to keep your old 401k plan with your old employer, the money will be separate from any new 401k plans or IRAs that you have, which can increase the complexity of retirement planning. CNN recommends that investors use a ""trustee-to-trustee transfer," a type of rollover where funds are directly transferred from one retirement account to another instead of given to the employee in the form a check that must then be transferred to an account.
Benefits
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401k rollovers can give you more control over your retirement funds and allow you to maintain the ability to take funds out of your retirement account if necessary. Keeping retirement funds in a single account can reduce the number of statements you receive and make it easier to plan. IRAs carry similar tax advantages to 401k plans, meaning a 401k to IRA rollover can allow you to avoid paying taxes until you ultimately withdraw funds in retirement.
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Drawbacks
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401k rollovers can have a few drawbacks. Rollovers may require transfer fees and there may be extra penalties applied to transfers if you do not understand all the rules involved. According to CNN, if you choose to have your employer cut you a check instead of using a trustee-to-trustee transfer, "your old employer will automatically withhold 20% of your balance for income taxes." While you will get the money back when you file your tax return you must make up the difference to rollover the full amount into the new account and avoid a withdrawal penalty.
Time Frame
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If you choose to have your employer cut you a check instead of using a trustee-to-trustee transfer, you have 60 days to roll over the full original value of the 401k to the new account. The full amount must be rolled over into the new account within this time to avoid penalties.
Considerations
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If you have stock in your employer in your 401k plan, it may be subject to special tax advantages. U.S. News & World Report suggests that investors consider keeping employer stock in their original 401k plan to take advantage of these benefits while rolling over other investments to an new account.
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