5 Most Common 401k Rollover Options

When you leave your employer, you may need to evaluate your 401k rollover options. It is important to spend some time and look at the different options that are available so that you will make the best choice for your situation. Here are some of the most common 401k rollover options.

1. IRA

One of the most common rollover options is the IRA. The individual retirement account provides you with the same type of tax advantage that you are getting with a 401k. With an IRA, you are going to be working with an individual financial broker. IRAs typically have many more investment choices than what you are used to with a 401k. However, you will have to deal with a smaller annual contribution limit. With the IRA, you can only contribute as much as $5000 per year or $6000 per year if you are over 50. This is quite a difference from being able to contribute $16,500 or $22,000 with a 401k. 

2. Roth IRA

Another similar option is to go with the Roth IRA. With the Roth IRA, you will have the same investment choices in contribution limits as an IRA. The big difference with this type of account is in the way the taxes are handled. Instead of contributing pretax money to the account, you will actually contribute after-tax money. Then, the gains that you make from investing are allowed to grow tax-free. When you start to withdraw the money from the account at the age of 59 1/2, you will not owe any taxes. If you were to roll over your funds from the 401k into this type of account, you would have to pay taxes on the money first.

3. New 401k

If you immediately start working for a do employer that offers a 401k plan, you could also roll the funds over into a new account. This will be the same type of investment account that you are used to except it may be administered by a different company. The two different 401k providers will transfer the money directly between themselves.

4. Leave the Money

You can also elect to leave the money in your employer's 401k account. In order to do this, you will need to have an account balance of at least $5000. Whether you can use this option will depend on the rules of your individual employer's 401k. Not every 401k plan allows for this. If you are unsure of what to do, this can provide you with a place to keep the money without incurring any distribution penalties.

5. Buy a First Home

Another option that you could explore is using the money to purchase a first time primary residence. If you use the money from your 401k account to purchase your first home, you will not have to pay the 10% early distribution penalty. Therefore, if you are in the market for home, this option could make a lot of sense for you.

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