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The Benefits of Rolling Over Your 401K From Previous Jobs

May 01, 2012 | Comments: 0 | Views: 167

Many employers offer some kind of retirement plan that allows the employees to save for retirement on a regular basis out of their paycheck, most of the times on pre-tax basis allowing employees to save on taxes. Most of these plans are called 401(k) plans. Some employers also match the employee contribution to their retirement plan. This is essentially free money, employees would not get this if they don't contribute to the retirement plan. One should always take advantage of this benefit and try to at least make the contribution so they max out on employer match. Let's say if an employer matches 50% of an employee's contribution up to 6% of the salary. One should at least contribute 6% to his 401(k) to get the additional 3% match from his employer. This is an excellent way of saving money for retirement.

Now the issue comes when one leaves the job, what should one do with the 401(k) plan with former employer? There are a few different options.

1. Leave the money with 401(k) plan at the former employer. This would work fine until the employer terminates the 401(k) plan or the 401(k) management company starts charging additional fees as new contribution is not coming. Let's say if you change three jobs in 10 years and leave the 401(k) at each job, you would end up having to manage and track three different accounts.

2. Roll over the 401(k) to the new employer's 401(k) plan. This option is fine if the current employer offers a 401(k) plan. This would be preferable as that way all the funds will be in the same account and there is only one place to manage,

3. Roll over to an IRA. Now this one is an interesting option. It has the added advantage of not having to keep moving from 401(k) to 401(k) and you will be able to manage the money yourself without the restriction of being tied to what the employer offers.

4. Withdraw money from the 401(k) and spend it. One should never do this, even in circumstances when the money is needed immediately. There are ways of getting loan against your IRA which is preferable to withdrawing the money. Withdrawing the money would result in tax penalty.

So from above discussion, rolling over 401(k) fund to an IRA is clearly the best option for most people. There are many different options for IRA, there is self directed IRA which gives you the full flexibility of investing the IRA fund with different options like buying Gold, invest in real estate, lending money to individuals and businesses for better interest etc. You should only select self directed IRA if you want to handle the investment yourself and have good knowledge and understanding of where you are investing. Many people end-up losing lot of their retirement money if they don't know what they are doing and that can be dangerous. There are simple options out there which would give you the diversification you need for IRA and still get you good return with minimum decision making on your part.

I hope this article gives you clear picture of different options available for rolling over a 401(k).

Dan is an expert on IRA Investment Options and written about Best IRA to roll over a 401(k).

Source: EzineArticles
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