401K Rollover And Other 401k Features And Benefits
A 401k retirement plan offers several notable advantages to the holder. These are:
Tax Breaks: In order to encourage people to save up for their retirement, the government gives tax advantages to 401k plans. Money inside the account compounds interest tax-deferred. Taxes on any capital gains, dividends, or interest are not levied until the funds in the account are withdrawn. Contributions – which can be from the company or the employee – are tax-deductible.
Transferability: Changing companies doesn't mean the end of the plan. The employee can retain their old company's 401k plan even if they no longer work there, with administration fees being charged. An alternative course of action is to use a 401k rollover to shift assets to their new company's 401k or to an Individual Retirement Account.
Contribution Matching: Most employers match their employee's contributions up to a certain point. They do this to qualify for employer tax incentives and to foster company loyalty.
Investment Options: Most 401k plans allow the employee to decide which investments to put their money in, to suit their tastes. These include company and outside stocks, bonds, fixed or variable annuities, group annuities, mutual funds, etc.
Loans: Most 401 (k) plans allow loans of different types, such as hardship loans or home loans. These are often governed by company regulations.
What's a 401k Rollover and Why Should I Do It?
A 401k rollover is the name given to the transfer of a 401k plan from an employer or employers (former or current) to an Individual Retirement Account or a similar 401k plan. Why would you want to transfer your 401k being maintained at another company?
For one thing, you're being charged various fees to maintain that account. If you've had a series of employers, with a 401k running in each, this could cost a large amount of your money and reduce your overall net worth. You might also wish to take advantage of your current employer's 401k offering. In any case, consolidating all your accounts not only reduces the money you spend maintaining them, but also reduces your headaches because you only have to keep track of one account and its investments.
The convenience offered by having to read only a few reports, as opposed to dozens sent by multiple fund managers from multiple accounts, also enables you to scrutinize your investments more closely and make more appropriate investment choices. Getting old and risk-averse? Try something like short-term bonds. Still in your thirties or forties and willing to take a longer shot? Invest a reasonable amount in a mutual fund or the like.
You can also benefit from rolling over your 401k into an IRA because the right plan can reduce your expenses quite a bit. Some 401k investment plans and IRA plans suffer from high internal fees, and switching to, say, a fee-based brokerage IRA could end up saving you quite a bit of money.
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