After I joined the workforce in the 1980's, I was automatically enrolled in the company's 401K account. My 401K plan allowed me to make contributions to my retirement fund without being taxed for it. Since then, I paid taxes only on my income net of my 401K contribution. The 401K plan was intended to be a retirement fund. Saving my contributions in the bank would mean it would just earn interest ranging from .02% to 2% per annum. The interest earnings would vary depending on whether I deposit the funds into a savings account or make a time deposit as well as how large the deposit is. On the other hand, my 401K funds would be pooled with other employees' funds into a mutual fund and administered by the company. The company, acting in its capacity as fund administrator, invests the mutual fund in stocks, bonds or similar instruments that generates higher yield in terms of interest or dividends income. The choice of where my 401K contributions will be invested was left to my discretion. The 401K retirement plan is clearly the better option in planning for retirement.
However, I was offered me better prospects by another company: better pay, better benefits, better working hours and the like. I was faced with dilemma of what to do with my 401K account. I could withdraw my money from the company's 401K account and use it any way I please. {But since I have not reached the prescribed retirement age of more than 59 ½ years, I could be taxed by the IRS with taxes on all of the money and apply an additional 10% penalty or excise tax for early due to untimely distribution. | But since I had not yet reached 59 ½, the prescribed age for normal distribution, I could be taxed by the IRS with taxes on all of the money and apply an additional 10% penalty or excise tax for early due to untimely distribution. | However, since I had not yet reached 59 ½, the prescribed age for normal distribution, I could be taxed by the IRS with taxes on all of the money and apply an additional 10% penalty or excise tax for early due to premature distribution. | Had I done that I would have been taxed by the IRS with taxes on all of the money including an additional 10% penalty or excise tax for due to untimely distribution since I had not yet reached 59 ½, the prescribed age for normal distribution.} I was left with the option to do a rollover of my 401K account.
The question then became: how do I roll over my 401K funds? In roll over, I have two choices. I can rollover my funds into my new employer's 401K account or rollover into an IRA or Individual Retirement Account. The IRA retirement fund is similar to the regular 401K account but the funds are managed by a broker or another company.
Ascertain your eligibility for roll over before answering the question "How do I roll over my 401K funds?" Only terminated employees are allowed to withdraw their funds before they reach the prescribed age and roll over their 401K funds. Such was my case when I resigned from my former company's employ. To avoid being penalized for early distribution, I opted to roll over my 401K funds into a Roth IRA account. This IRA account was named after Senator William V. Roth, Jr. after he introduced the Taxpayer Relief Act of 1997. The Roth IRA account allows me to make larger contributions into my fund and to make withdrawals that are generally tax-free. One such case of a tax-free withdrawal is if I withdraw my rolled over fund after 5 years following roll over. However, restrictions on distributions before the prescribed age in the 401K plan likewise apply in the Roth IRA account. In contrast to the 401K Plan, the Roth IRA allows for a catch-up contribution for those over 50 years old.
In my planning for retirement, I weighed all options and came up with the idea that the IRA suited me better for me to be able to achieve my retirement goals. In the process of planning for yours, find the options that best suit your needs.
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