Financial Planning

Employees who have left their jobs and plan to take their retirement account with them have heard all about how to roll over a 401(K). This just means you can move your 401(K) employer investment account to a brokerage of your choice. You do not need to keep your account with your employer’s brokerage, and in fact it would be bad idea to leave it sitting there after you’ve left the company.

When you roll over your 401(K), you are moving your funds without the usual withdrawal penalty, because you’re moving it from one broker to another, and not taking possession of the funds yourself. Once it’s at a new brokerage, the rules changes about how you can invest. Your options for investing in stocks, ETFs, mutual funds and even stock options open up to be far more diverse than you had under your employer’s plan. So it’s always a good idea to move your funds, and take control of your retirement.

It’s also true that once you roll over the investment account to a self-directed 401(K), you will no longer be under the rules of your employer’s management. This means you can even withdraw your 401(K) money, without the usual restrictions that employers impose. This however is not a good idea. There are still federal tax penalties, as well as the fact that you will have to pay taxes on any money you withdraw. This means that up to 40% of the money you want to withdraw will be owed to the government. That’s money that could have been working for your retirement security instead of being paid to Uncle Sam.

If you’ve been fired form a job however, and money is tight, and it’s between losing a home and withdrawing from your rollover 401(K), then it might be a consideration you have to make. Just think twice before taking your rollover 401(K) out to spend, since now you will have a change to invest more freely and for higher returns.