An Easy Guide to 401k Conversion Options


You’ve been putting money into your 401k or other employer-sponsored plan, but not that you’re changing jobs or retiring, what should you do with it? You obviously want to be as comfortable as possible in retirement, but one option for converting your 401k could be more beneficial to you than others. Should you cash out, rollover into an IRA or leave the plan with your former employer. Each of these options has its pros and cons, and you need to consider carefully which is the right option for you. If you’re unsure about how any of these options work and which one you should choose, check out the information below to learn more about them.

Cash Out

Your first option is to turn your 401k into cash. Many financial experts view this option as a bad idea, compared to the other two choices. When you cash out, you may receive your money, but you will also be taxed. Additionally, you will lose any money that you might have generated in the future. Since your employer must keep 20% of your money for the IRS, you won’t get all your money. It will also be taxed as ordinary income if you don’t put it in a qualified retirement account within 60 days. You may also have to pay state income tax, plus a 10% early-withdrawal penalty if you’re under 59 ½.

Leave the Funds with Your Employer

Your second option is to leave your funds with your former employer. To do so, you need to have a certain amount of money in your retirement account. The amount you need will depend on the type of plan you have. You also won’t be able to contribute any future funds to the account. Although this option is better than cashing out, it still could have an adverse affect on your retirement funds. Often when employees leave their 401k with their former employer, they neglect it and lose control over it. One good reason to leave your funds behind is when you can borrow from your account. If you can borrow from your 401k, it serves as a great backup for when your funds start running low. The money you borrow won’t be taxed, as long as you repay it. However, not all plans have this option.

IRA Rollover

The final option is to rollover your 401k into an IRA. An IRA rollover will give you control over your retirement funds, without the financial drawbacks of cashing out or leave your funds behind. In a direct rollover, your funds are sent straight from your retirement plan to an individual retirement account. You can also use an indirect rollover, where you are sent a check and have to put the money into a retirement account within 60 days. There are different types of IRA you can use. You could conduct a 401k to gold IRA rollover, use a Roth IRA, an SEP-IRA or a Simple IRA.

You can have more than one IRA if you want to combine the different benefits from different types of account. If you want to have more control over your retirement funds with a wide range of investment options, an IRA is your best bet.

Flickr image from Tax Credits