What is a Rollover?


401k rolloverRollover means to move money from a retirement plan such as a 401(k), 403b (tax sheltered annuity), or 457 (municipal deferred compensation) into an IRA or other plan. If you receive a payout from your employersponsored retirement plan, a rollover IRA could be to your advantage. You would continue to receive the tax-deferred status of your retirement savings and would avoid penalties and taxes.

There are two reasons that rollovers are favored over other options:

  • You have virtually unlimited investment selections. Unlike your employer’s plan which may have six investment options or even 50 investment options, in a self-directed IRA, you can choose any stock, any mutual fund, and a host of other options listed later.
  • Company plans often can restrict choices for non-spouse beneficiaries. Specifically, they may not be able to stretch IRA distributions over their lifetime. The benefit of this “stretch” is that it defers taxes and allows the funds to potentially grow longer and larger in a taxdeferred environment.

The reason to leave your retirement plan with your company (if they permit this) is because your company plan is covered by ERISA and is protected from creditors. However, under the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the creditor protection will follow the money if it is rolled into an IRA and not commingled with other IRA money (from annual contributions).

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