401k Rollover Options To Save Payment Of Tax And Penalty

401k is a government regulated retirement savings plan. In this plan an individual contributes a part of his/her salary annually to save for one's retirement. In this plan investors have an added advantage. The contributions grow tax deferred till the time of retirement. However, people may choose to rollover the funds from this account to another investment plan if a situation arises.

There are various reasons which may induce a person to rollover the funds from one account to another. This rollover can be from one 401k plan to another 401k plan or from a 401k account to an IRA. This rollover has certain conditions and clauses involved which need to be taken care of before the rollover can be authorized.

When an employee changes a job he/she may either decide to move the funds from the previous employer to the account with the new employer. Or he/she may decide to allow the previous employer to manage the funds. However, this option is quite expensive as most of the employers charge money from ex employees for maintenance of accounts. Therefore, people generally roll over the funds to a new account. This account could be a new rollover 401k account or a rollover IRA.

An employee can choose from two ways to move the funds from one account to another. First is a direct rollover. In this an employee is not given cash but the funds are automatically transferred from one account to another. In the second option, a person can receive direct cash from the employer. However, in this the employee has to deposit the cash to some other retirement savings plan within a period of 60 days. Failure to do so may result in penalty. The amount withdrawn would be treated as early distribution and apart from normal taxes, a penalty of 10% would be levied on the employee.

An individual might have a 401k plan with several employers. If such a person wants to withdraw the amount before 59 1/2 years of age and without attracting any penalty, then he/she has to rollover the previous accounts into the new one. The 401k account under the last employer does not attract any penalty if an individual retires after the age of 55.

However, an individual can also rollover the money into an IRA. This account has an advantage over 401k. Under 401k an employee can invest only in those options that are provided by the employer. But in an IRA an individual may invest in all the available schemes. These schemes can be chosen with the help of an investment manager.

Therefore, an individual should carefully choose out of all possible rollover options. An unqualified rollover may result in penalties and should be avoided.