401k Rollover

If you are confused about what to do with your 401k, you are not alone. Many Americans dutifully contribute to the 401k plan provided by their employer, but when they leave that job instead of doing a 401k rollover, they cash out the account.

The 401k provision was designed in the late 70s as a way to supplement the dying pension model of business. Up till that point, most workers joined a company and worked there for life. Their service ensured a pension that would ease them through their retirement years. That model was on its way out when Congress enacted the 401k laws that created the self-funded retirement accounts we know today. With pre-tax dollars, you grow a retirement account that is as big or small as you have the discipline to create.

The 401k rules dictate how much money you can contribute in a year because otherwise you may load up that account with pre-tax dollars and Uncle Sam would be left waiting for his “fair” share. The limits are not punitive at all — the average worker can contribute over $15,000 each year. If you actually put that much aside for retirement, you would be in great shape come age 65! The rules also allow for you to move the account when you change jobs. This is, again, in response to the changed landscape of the late 70s and early 80s as the average American worker found that they moved and changed jobs at least three times in their work life. Quite a shift from our grandparents days when a lifetime of employment with a company was almost a right.

The transfer provision, called a rollover, allows you to keep all of your retirement funds in one place. 401k rollovers are simple to request. Usually all it takes is a form that you get from HR and fill out and return, letting them know what company you are moving to. They will do the rest and get the individual 401k account shifted to its new home. A rollover usually takes some time, because the employer matching funds have to be calculated. They only do that a few times a year, so your money might sit for some time in what’s called a 401k rollover account. Not to worry — the money is growing as if it were still just a regular 401k.

As you can see, a 401k is not as complicated as you thought. It is a great way to save for retirement and with the money coming out of your paycheck pre-tax, it gives you a chance to mitigate your tax bill. Most people don’t think of it that way, but if you could have $15,000 of your wages not taxed, you’d do it, right? The only difference is that you don’t get to spend the 15k right now. But in 20 or 30 years it will be closer to a million dollars anyway and that will be much nicer.

Categorized | Retirement

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