7 Things I Wish People Knew About 401(k) Plans
1. You can roll it over when you leave. When you leave your employer, you can transfer your 401(k) plan to an individual retirement account, and it is not a taxable event. This type of transfer is called a rollover. Many 401(k) participants think any type of distribution from their 401(k) plan is taxable and subject to penalties. That isn't true.
All plans allow rollovers to an established IRA account. Usually, the check is made payable to the new financial institution as the custodian, with an "for benefit of," or FBO, to you. If you have a few 401(k) plans from former employers, I advise consolidating them into one IRA account. That will make it far easier to handle address and beneficiary changes, manage investments and track distributions once you are retired.
2. Automated portfolios work. Most 401(k) plans today offer either a fund choice or an online interactive tool that will make the investment decisions for you. These types of automated portfolios are great choices. If it is a single fund, it may have a retirement year in the name of the fund, such as "Target Date 2030." In that case, pick the fund that corresponds with the approximate year you think you may retire. A single fund like this is a complete diversified investment that automatically allocates your money across many asset classes.
