When you leave your job, one of the options that you have with regards to your retirement funds is to rollover the qualified plan into another form of retirement vehicle. By rolling over into another qualified retirement funding vehicle, you maintain the ability to grow your funds tax-deferred and can enjoy the benefits of this type of accelerated growth.
Depending on your circumstances, it may be beneficial to rollover your funds into an Individual Retirement Arrangement or IRA. IRAs can allow for more flexibility and greater account access. They also provide allowances for specific penalty-free withdrawals such as qualified educational expenses, medical expenses, and first-time home purchase up to a maximum of $10,000.
Furthermore, a rollover to an IRA can provide greater estate planning and distribution flexibility than a traditional qualified retirement plan. IRAs generally allow a broader spectrum of beneficiary designations. You may determine whomever you wish to act as beneficiary of your account, whether it is your spouse, child, grandchild, trust, charity, etc.
Finally, a rollover from a 401k to an IRA allows the investor to expand the available investment options and products. The qualified plans investment restrictions will not necessary apply to a new IRA account, though there are certainly still restrictions. This will allow you to better diversify away your risk.
This also provides unique and attractive options if you are not relocating to another position and find yourself out of a job. Under the IRS Revenue Code Section 72(t), you may make early withdrawals from your IRA as long as they are part of a series of formula determined periodic payments. These payments must be formulated on the life expectancy of the employee or the life expectancy of the designated beneficiary. This can also be determined by the joint life expectancies of these individuals.
In other words, you may be able to access your retirement income from an IRA rollover account before you reach the age of 59 1/2 and avoid paying the 10% early withdrawal tax imposed by the IRS. These payments, once started, must be received at least annually for the greater of 5 years or until you reach age 59 1/2.
Keep in mind that you are not able to pick the exact payment amount that you would like to receive out of these accounts. The distribution is determined by a formula that the IRS has set, and deviations from the formula are not permitted. If you find yourself needing additional income, multiple IRA distribution strategies may be available.