401k Rollover

A 401k rollover is one of the largest sources of cash available to people to start stock market investing when they terminate from their employer. I know that one of my first jobs was at a bank where I had worked for around 8 years. At the time, I had all of my funds invested in the bank stock. Fortunately, when it came time to liquidate those shares, the bank stock's value was at a price where I had made money. This was way before the banks needed a bailout so I was lucky.

Like most people, I had the option to do a 401k rollover to IRA transfer. I can't remember for sure, but I think that back then you could actually take possession of the money and as long as you had it back in the account within 60 days, you didn't have to pay a penalty. I was still pretty young at the time and think that I cashed in my 401k and paid the penalty. Whatever you do, do everything you can to continue to save the money.

They've since changed the rules somewhat in that now 401k rollovers have to be done a certain way. This was the case when I left my second job. The 401k rollover rules require a direct transfer to the institution you are moving the money to. If it doesn't go that way, they will withhold 20% even if you put it into an IRA within 60 days. You'd then have to come up with the extra 20% to avoid the early withdrawal penalty. While many financial advisers make this transfer seem complicated to get you to do business with them, it's not really something you need an adviser for so I wouldn't pay for this service as most financial institutions provide it for free. Do banks offer 401k rollover IRA's? Yes, but I'd opt to do it on my own.

There are several 401k rollover options available to you. Each involves moving the money under the umbrella of an IRA. The only question is what underlying vehicle will you fund it with. You could fund your IRA with mutual funds, individual stocks, real estate, certificates of deposit (CD's), annuity contracts or many of several other investment options available.

Many insurance agents will advise that you put your money into an annuity contract inside your IRA, but stock brokers will argue that the expenses you pay for the death benefit are an unnecessary expense. The adage don't put fund your tax deferred account with a vehicle that is already tax deferred in that it is redundant is the argument they bring out. While I'm not 100% sure this is correct, it might depend on the annuity contract and your age. I know that one adviser that I know of used guaranteed annuities from Prudential that guaranteed the principal even if the market went down, a huge guarantee considering what we just experienced in 2008 in the market.

The 401k IRA rollover that I would prefer is one that you is funded by individual stocks. By using a stock brokerage account to put your funds in, you can avoid the expense of an annuity and give yourself more control over the stocks that they are invested in. As I've said in previous posts, why not take the time to direct your own investments. If you do not have sufficient investments on hand with your broker, you won't get the advice you need. You'll end up like most people in 2008 that lost almost half of their investment. Don't you think that you can do that on your own? It's not crazy to think that. I know that I could. And, I'm sure you can too.

With the creation of the Roth IRA, many people wonder whether a 401k rollover Roth IRA might be an option and I would not recommend it. Roth IRA contributions are after tax in nature where 401k contributions are before tax deductions from your paycheck. Because these are different types of contributions from an IRS standpoint, you do not want to mix them.

If you have been at your employer for a long period of time, your 401k rollover might be the largest part of your nest egg. Self directing your own IRA investments might be a scary task if you are a beginning investor. This is something we talk about more in later posts on Stock Market Investing Today.