photo by MargoLuc

There are many factors to take into consideration when rolling over your 401k.  Whether you have recently retired, or have simply switched employers, the following article outlines six questions to ask when determining what is best for you.

A Step by Step Guide to Your 401k Rollover or Retirement Consolidation - Understand Your Rollover Choices

Excerpts taken from Insider’s Investment Guide on August 24, 2009

Rollover Choice One - Figure Out Your Retirement Needs and How You Should Use Your Retirement Funds

Retirement planning is not easy. It is a budgeting process for the rest of your life for which you must account for many unknowns like inflation, stock fluctuations, changes in real estate prices, personal health costs, taxes and your own longevity.

When deciding what to do with your 401k, the most important consideration is your retirement plan and how it may need bolstering. This is a big and important question and many retirees choose to work with a Financial Planner who can help them create a strong plan.

Rollover Choice Two - Decide to Rollover or Keep Funds in Company Plan or with Existing Institution

Once you have a better idea of how you need to use your savings for retirement, you can better decide if you require a rollover.

Rolling Over from a Company Plan: Some 401k plans require that you rollover the funds at retirement. Others do not. However, if your retirement funds are in a company plan, most financial planners advise that you rollover.

The advantages of rolling over your 401k into an IRA at retirement include:

• Rollovers provide more flexibility in how you can allocate and use the money. You can rollover your funds into a vehicle suited to your particular situation.
• Security against your employer going out of business, merging with another company or other event that could potentially impact your 401k funds.
• More control over when and how you can withdraw money and manage your account. (Employer sponsored 401ks often have limits on when you can do this.)
• Ability to consolidate all of your 401k accounts into one IRA. Many retirees have 401ks at various companies. This money will be easier to manage in retirement if you consolidate it in one place - even if it is invested in different types of financial products.
• Puts you in charge of your account. Even if you like your current 401k plan, there are no guarantees that your employer will stick with that platform.

While there is no requirement to rollover your retirement funds, most believe it to be a good idea.

Rolling Over from Existing Financial Institution: If you have already transferred your funds out of your company plan or if you have various accounts with different institutions, you may want to consolidate with a single financial institution that offers the type of investment vehicles and financial advice that you really need in retirement.

Rollover Choice Three - Choose Between an IRA and a Roth IRA

There are two main types of 401k rollover accounts - IRA and Roth IRA. The IRA is also sometimes referred to as a traditional IRA.

The main differences between the two accounts are related to taxes and the rules surrounding withdrawals.

Rollover Choice Four: Decide How Much Rollover Advice and Service You Need and Understand Fees and Minimum Balances

When opening an IRA at retirement, there are two buckets of fees and costs that you will want to consider:

• IRA and Account Maintenance Fees: There can be fees associated with opening and maintaining an IRA. Before opening a Rollover IRA, be sure you understand any setup fees, maintenance fees, trading commissions and minimum balance requirements.

While you may automatically think that you would like a “no fee IRA,” you are actually likely to find significant costs associated with them when you read the fine print.

• Financial Planning Fees: There are two main routes to opening an IRA. You can be self directed or you can work with a Financial Advisor.

Rollover Choice Five - Find a Financial Institution that Offers Qualified Investments that Suit Your Retirement Goals

Depending on your retirement goal - guaranteed income, adequate insurance, estate planning or a combination of these objectives - you will want to choose an investment strategy for your 401k rollover.

The good news is that you have an ever growing number of tax friendly - “qualified” options. These options include:

• CDs
• Bonds and Bond Ladders
• Stocks
• Dividend Yielding Stocks
• Exchange Traded Funds (ETFs)
• Money Market Accounts
• Mutual Funds
• Annuities
• Insurance
• Managed Accounts
• Hybrid Products - offering benefits of many of the above products

Rollover Choice Six - Respect the Distribution Rules!

The final step when conducting a Rollover is to respect the Distribution rules.

• Respect Distribution Rules with Rollover: When rolling over 401k funds or consolidating IRAs, it is very important that you follow the distribution rules. In most cases you should probably do a Direct Rollover. With a Direct Rollover, a check for your retirement funds is made payable to the new IRA custodian or financial institution. This is the preferred way to conduct a rollover since there is no chance of there being tax consequences as is possible with an Indirect Rollover.

With an Indirect Rollover the check for your funds is made payable to you. And you must forward the money yourself within the allotted time period.

• Respect the Plan’s Distribution Rules for Withdrawals: This is particularly important if you rollover your funds into a Traditional IRA. Withdrawals on a Traditional IRA (also known as distributions) can begin at age 59 1/2 and are mandatory by 70 1/2. (Withdrawals before age 59 and a half are usually subject to a 10 percent penalty.)

With a Roth IRA, withdrawals may be taken at any time without penalty and there is no mandatory distribution age.

Visit Insider’s Investment Guide online to read the entire article.