Named after the Internal Revenue Section 401k which explains the program, 401k is a form of retirement savings account offered in the United States. This program took effect in January 1, 1980, with the first plans officially adopted by Americans in January 1982. A 401k plan is a retirement plan established by employers where the employee can elect to make contributions to the account via salary deduction. IRA or the Individual Retirement Plan, on the other hand, is a type of retirement plan that allows an individual below 70 years and 6 months, and who has some form of earned income to save money for retirement. Both these plans are qualified for tax benefits and advantages. A person with a 401k plan may choose to transfer his 401k to IRA for a number of good reasons.
A person transfers his 401k to IRA because he is switching jobs and he no longer wants to have his 401k plan managed by his previous employer. An individual opts o transfer his 401k to IRA so that he can make desired investments without the potential restrictions that his previous employer may implement later on.
A person is apt to rollover his 401k to IRA because he is leaving his job and he doesn’t want to withdraw his funds. He knows that cashing out prior to the retirement age of 59 and ½ will cost him a 10 percent early withdrawal penalty tax. This means that if he pulls out his total savings of $100,000 before retirement, his take home money would only be $90,000. This will cost him a total of $10,000 worth of losses. That’s really big, and he’s aware of that.
A person transfers his 401k to IRA because he is no longer happy about his current 401k plan. He decides to rollover his 401k plan because he wants to have full control of his money. He doesn’t have the exact same investment choices as he did in his 401k and now wants the flexibility to choose the assets that are best for his current situation.
Indeed, there are quite a few reasons why people choose to transfer their 401k to IRA. But regardless of what their reasons might be, the more important lesson here is that these people do understand the value of saving money for the future. They do realize that making wise investments today can lead to a happy retirement later in life.
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