If you've been with your employer for five years or more, chances are you accumulated enough savings for the first few years of your retirement. However, you'll never know when a company merger or take-over will take place. Even if that doesn't happen, there are a few reasons why you should consider roll over 401K to another third party investment.
When you got your first job, your company might have assisted you in setting up your 401K. This relatively new type of retirement plan essentially allows you to set up a tax deferred investment which allows you to accumulate funds up until you reach sixty years of age. It is tax deferred in that you don't have to pay income taxes until the fund is withdrawn. Employers also typically match the employees contribution to increase the savings.
A roll over simply refers to moving you current plan from a former (or even current) employer into another plan or individual retirement account (IRA). Many IRAs have similar policies to your previous investment, and there are many reasons why you would want to consolidate your investment into an individual account. If you have several 401k plans from different jobs, then you may want to roll over to an IRA.
The first reason why many employees choose to do so is to cash out, although this is not a very good idea. Remember that these traditional investments are tax-deferred, and you will have to pay the tax on the amount you withdrew early, plus a penalty. The general rule is a ten percent penalty on the amount taken out, although there are a few exceptions. The rule tries to discourage people from doing this so that they can get more benefits later on after they retire.
Another reason people choose to do so is to cut down on the expenses. With individual retirement accounts, the internal costs are usually much lower because you get to decide how the money will be invested. Because your company dictates how the plan is spent, they may place it in a higher yielding but riskier venture.
The average internal cost for the usual 401k is around two to three percent while IRAs can have less than one percent in total expenses. Those figures can have a huge impact ten or twenty years down the road.
If you've changed jobs frequently over the last few years, you may have different investment plans initiated by your previous employers. While there is nothing wrong with this, you'll end up with different accounts. Not only will you receive more paper work, those other accounts will remain dormant and the funds will not be maximized. If you consolidate those funds, you'll be able to divert the investments and maximize all your savings in a good portfolio.
Keeping track of all that paperwork can also be a hassle. Once you roll over 401K to only one investment plan, you'll have more time to go over the fine details and you won't have to worry so much.
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