Section III-B - Lesson 2
Your IRA - As Rollover For 401k Money
Sooner or later you’ll need an IRA, either as an alternative to a 401k plan, or as a rollover vehicle when you change jobs or retire, so we need to spend a little time discussing them. Even though we now enjoy the benefits of a company 401k, this may not always be the case. Our next employer may not offer this benefit.
Just about all of us, in this day and age, will change jobs at least once during our lifetime. If you had a 401k in your previous place of employment, you’ll most likely want to roll it to a self-directed IRA when you leave. This is usually a better option than just leaving it at your old company (which is not always an option) or moving it to your new company, where you may have restricted investment options.
By rolling to an IRA account at the same mutual fund company that handles your regular money account, you can get out of whatever fund you’ve been stuck with, and into the same security that you use for your regular money, presumably an S&P 500 Index fund. You also gain the convenience of dealing with a single company when you have issues concerning either account.
It’s a good idea to keep this rollover IRA separate from any other IRA you may have at this fund company. You’ll want to retain the original identity of this money because there may be specific tax considerations, which apply to this account, which do not apply to your other IRA’s.
For example, some company “thrift plans” allow participants to save after-tax money, as well as pre-tax money, and/or meet the company match with company stock which vests in strange ways, accompanied by complex average cost calculations. The result is that when withdrawals are made, they are not always fully taxable, but only partially taxable, unlike normal IRA withdrawals. If this account was commingled with other IRA’s, these benefits would be obscured and full taxes would always have to be paid.
The other time that you’ll most likely wind up with an IRA is at retirement when you roll your company accounts into a self-directed IRA. Although your old employer may indicate that he’s willing to continue to carry your 401k account, you don’t really want to leave it there because your access to this money would be so much more limited than it would be with an IRA at a mutual fund company.
When you roll this money to an IRA, you preserve all of your tax benefits but open the door to all sorts of flexibility as regards access to your money. As long as you’re over the age of 59 ½ (and sometimes even when you’re not), you can do whatever you want with your IRA money. You can request a check anytime you need to, or you can request a regular monthly withdrawal, or both, without needing to get approval from anyone but yourself.
Another big advantage to rolling as soon as possible is to get to switch into the security that you really want, presumably an S&P 500 Index fund, and out of the security that you’ve been stuck with in the company 401k plan. Your rollover at retirement will usually involve a serious amount of money, and you’ll want to be invested in the very best possible fund.
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