What is a 401k Rollover?

 

A 401k rollover refers to the process of shifting a 401k plan from a current or former employer into an Individual Retirement Account (IRA) or a similar qualified plan. IRA is an abbreviation for ‘Individual Retirement Account’ and is identical to a 401k plan. It is not mandatory for an employee to consolidate his retirement accounts into an IRA but this practice is very popular because of a variety of reasons. If an employee contributes to several 401k plans during his working life, he may consider doing a rollover more than once. A 401k rollover allows an employee who has been employed at different organizations throughout his career to consolidate his 401k plans from different employers into a single 401k or a retirement account. This consolidation, besides saving on record keeping and other such fee for each separate 401k plan leading to considerable operating costs, also makes managing the retirement accounts a lot easier since the employee need not keep track of several different 401k accounts. After a rollover, the employee’s retirement funds are not scattered into a number of different 401k plans that he had with each of his former employees. Instead, he can concentrate his attention on the consolidated retirement account owned by him after the consolidation process.

However, a number of factors must be taken into consideration before going in for a 401k rollover. A 401k rollover is a complicated process when compared to other similar processes such as an IRA rollover. 401k rollover procedures are different because the assets a 401k plan are held in a different manner as compared to the assets held in an IRA. The assets in a 401k account are held in a Trust and are not owned by the account owner as in the case of the Individual Retirement Accounts (IRAs). Since the employer sponsors a 401k plan, the assets are not considered the property of the employee but are in fact owned by the plan itself. Federal law requires that the contributions to a 401k plan must be held in a trust and administered by a trustee, who is tasked with the job of managing the assets on behalf of the account owners. Apart from holding the 401k assets on behalf of the employees, the trust also holds the employer's general assets. The creation of a trust forbids the employer to use the 401k assets as collateral for a business loan and the money is even protected against seizure by the creditors even in the case of employer bankruptcy.

Due to the intricate nature of the 401k-rollover process, an employee must be fully aware of the nature of a 401k account and the underlying reasons due to which it is difficult to undertake a 401k rollover in comparison to an IRA rollover. An insight into the 401k-rollover process also helps an employee to carefully analyze all the available options and find out if it is in his financial interest to go for a 401k rollover or not.