401K Rollover or 401K Withdrawal? By Timothy Simmons At Isnare.com Ezine Articles

When you get to the later stages of retirement planning it's important to understand the distribution process. You may be retiring in need of income, or just simply changing jobs. Regardless, there is a particular protocol that should be followed. If done improperly, it can prove costly. If done correctly, the savings can be substantial.

If you're fortunate enough to have an employer that offers a 401k retirement plan, you may have procured quite a nest egg over the years. So, if you're separating from service, it is important to handle everything properly. When it comes to your 401k withdrawal it's important that you understand the process. First of all, when withdrawing from any type of qualified plan, whether it's for income or a complete withdrawal, there can be consequences. If year 59 1/2 or older, you can take withdrawals from your 401k, without penalty. If you have a traditional 401k retirement plan, withdrawals are taxed at your income rate. At age 70 1/2, you are required to take mandatory withdrawals call required minimum distribution, or RMD. 401k withdrawals made prior to age 59 1/2 are subject to both income tax and premature withdrawal penalties. These penalties can be avoided by doing what's called a 401k rollover.

A 401k rollover allows you to move your 401k funds to another account. This is most commonly done by moving the funds to an Individual Retirement Account, or IRA. By making a 401k rollover to an individual account you not only get complete control, but also you have access to much more investment selection. This is often preferred when changing jobs or retiring. For these individuals, leaving funds at their previous employer doesn't make much sense.

When it comes to making the move you can make a 401k withdrawal in the form of a lump sum distribution. This is subject to a 10% penalty, if you're under 59 1/2 years old. Additionally, employers are required to withhold 20% that goes towards income taxes. The exception to this would be making withdrawal for a first time home purchase. You can withdraw up to $10,000 out of an IRA or 401k plan, without penalty, as long as it is for the purchase of your first home. The other way is to rollover those funds into an IRA or another employer's retirement fund without these penalties. In order to avoid these penalties, the rollover must be completed within 60 days. The best way to do a 401k rollover is to not do a physical 401k withdrawal at all. You can do a direct transfer into your IRA account or new employers retirement plan. This is preferable, but the 401k withdrawal can be done either way.

If you want to avoid premature withdrawal penalties you can commonly do what's called a 401k loan. This really should be avoided, however, unless you're in a very dire situation. The main reason being is that when it comes to paying back your 401k loan, you'll be doing so with after-tax dollars. Considering your contributions were pretax dollars, this makes for a very expensive loan, making even loan sharks jealous. If you plan to do a 401k rollover and have a 401k loan balance, you will be required to pay it off expeditiously. It's recommended that you find a more appropriate loan source.

An investment professional can be invaluable when it comes to this stage of retirement planning. He or she should be well versed in recent regulation, which could affect your retirement. It may or may not be appropriate for you to take a 401k rollover or 401k withdrawal; a little bit of the assistance is invaluable.

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