Should I Roll My Old 401(k) into an IRA?

Many individuals during their years of working have generally found that by contributing to a retirement savings plan that is funded by similar like-minded employees, and occasionally matched by contributions made by their employers has become one of the many ways in helping to reduce their taxes and save accordingly. These contributions are generally made from the salary, before the necessary taxes are applied, and the funds will grow within this tax free savings account until the employee decides to withdraw these funds. This retirement savings scheme is effectively known as a 401(k) savings retirement plan.

The 401(k) plan achieved its name during the 1980’s from the section of the United States Tax code designed to govern such investments arising from the need to implement an alternative method to pension schemes. Pension funds were previously offered to employees by employers. These pension funds were invested and managed by the employers, which resulted in benefits payable to the employee in the form of a steady income during the course of their retirement.

Unfortunately the costs of managing these pension schemes were deemed as too expensive for the employers which resulted in the pension funds being adequately replaced by the now existing 401(k) retirement savings plans.

The benefit of the new 401(k) plans allow the employee to determine how the contributed funds were invested offering money market investments, stocks & bonds and a range of target-date funds which are widely used investments allowing a combination of various stocks and bonds known for increasing in value as the employee approaches their age for retirement.

Although the 401(k) retirement savings plan offers the employee with a vast array of investment options designed in promoting effective savings, there are several restrictive measures and caveats within this plan. One of the more popular known restrictions has been the prevention of the employee to immediately access the contributions made by the employer. This is primarily due to what is commonly known as a vesting period, which is defined by the amount of time the employee is required to have worked for the company before those contributed funds can be made available.

This vesting period was implemented as a method of insurance to discourage employees from leaving the job before their retiring age. Another complicated and unpopular restriction contained within the 401(k) retirement savings scheme is the costly penalties which are incurred in the event of withdrawing funds from the scheme before reaching the age of retirement typically observed as 55 years and over.

The Individual Retirement Account or IRA on the other hand are generally available saving investment schemes.  An IRA provides the employee with similar tax exemptions as included within a typical 401(k) retirement savings plan such as the defer payments of taxes on current earnings and growth of accumulated savings prior to the withdraw of those funds. One of the major disadvantages within the Individual Retirement Account is due to more strict penalties stipulated by the United States tax law which recognizes a number of penalties applicable to the employee upon withdrawing the funds before reaching the age of 59.5 years.

There are several types of Investment Retirement Accounts each one consisting of its individual eligibility requirements and tax implications.

Retiring from your job after those valuable years of service brings to thought several vital decisions on how you’re going to spend the rest of your life, what do you plan to do in the coming days ahead, and what are you going to do with your 401(k).

During a recent study conducted by the Government Accountability Office, it was discovered that several known financial institutions were in the habit of misleading some workers by suggesting they consolidate their current account balances into what is typically referred to as an Individual Retirement Account or IRA a process commonly referred to as rolling rather than investing into known alternatives which could prove to be more potentially beneficial.

New regulations implemented by the Department of Labor in August 2012 required sponsors of existing 401(k) retirement savings schemes to submit simplified versions of disclosures detailing the fees and expenses incurred by their administration relative to the employees. This new regulation benefits the employees by providing a detailed report of new disclosures and allowing the employee to compare the available rates with other investments for possible greater returns. Such a disclosure will generally contain lower fees observed as most employers would have typically negotiated for lower fees to their respective 401(k) retirement plans.

The average employee retiring from their job for heath or other personal reasons before the age of 55 and older with an existing 401(k) retirement savings is eligible for accessing their accumulated funds of their 401(k) account without the fear of being penalized and charged penalty fees which may have been incurred upon initiating any such withdrawal.

Taking the decision to roll over their 401(k) into an Investment Retirement Account voids that option as individuals holding Investment Retirement Accounts are bound by the rules governing those investments preventing the withdrawal of any funds before the age of 59 and a half years old which is an excess of 4 and a half years; which is observed as an additional wait period compared to the 55 years mandate contained within the 401(k) retirement plan.

The typical 401(k) plan is effectively protected against both lawsuit and bankruptcy while the contributory Investment Retirement Accounts are only protected by bankruptcy of a value not exceeding One million one hundred and seventy United States dollars, and as such are liable to be affected by possible lawsuits. Thus rolling over your 401(k) retirement to an IRA deprives you of that added protection.

Another reason why a person should strongly reconsider rolling over their 401(k) retirement plan is; the United States tax law allows the average contributor to a 401(k) retirement scheme to actively borrow funds within their retirement fund of up to 50% of their available balance at a maximum of fifty thousand dollars  This is a feature that is not available to the typical Investment Retirement Account holder. Interest rates payable on the average 401(k) loan are generally much lower than banking rates with the added simplicity of being deductible from your current salary paycheck.