You have almost an infinite number of investment options. In a self-directed IRA, you can choose any stock, any mutual fund, and a number of other options. In your employer's plan, you may only have six or even 50 investment options.
Choices for beneficiaries who are not a spouse are often limited by company plans. In particular, they might not be able to spread out IRA withdrawals over the rest of their lives. The benefit of this "stretch" is that it delays taxes and gives the money a chance to grow longer and bigger without paying taxes.
If your company lets you, you should leave your retirement plan with them because ERISA protects company plans from being taken over by creditors. But under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, if the money is rolled into an IRA and not mixed with other IRA money, the creditor protection will follow the money (from annual contributions).
Adding other retirement accounts to it
Most of the time, the money for a rollover IRA comes from a company-sponsored retirement plan. You can add these distributions to your existing IRA(s) or put them in a separate IRA. However, see the new rule about protecting yourself from creditors, which was mentioned above. In fact, the IRS lets these funds be put into other kinds of retirement accounts as well. For example, if you have been self-employed and have a one-person profit sharing plan (often called a Keogh plan), you could move the assets from your employer's plan into your own. Or, if you have a second job and that employer has a 403(b) plan and also accepts IRA rollover contributions, you could roll your 401(k) balance into that 403(b) plan.
Taking care of your IRA rollover
When it's time to retire, you can move the money from your employer's plan in a few different ways.
Direct IRA Rollover: Your employer can put the money you get from your retirement plan directly into a Rollover IRA. This way, you won't have to pay the 20% tax that the IRS takes out of the money. You should tell your employer the name, address, and account number of the person in charge of your new Rollover IRA. For instance, you tell your employer that your retirement account should be sent to ABC Securities, account #8889999. The money goes straight into your IRA account, and you never touch it. This is the best way to move money from a retirement account.
Payout by Check: If your employer gives you a check for your retirement funds, the employer must hold back 20 percent for possible taxes. If you deposit the check plus 20 percent into a rollover IRA within 60 days, you can avoid the 20 percent tax that the IRS takes out of a check payout from your employer. To complete the tax-free rollover, you now have 80% of your IRA rollover in your hands and must take the other 20% out of your own pocket (you will get the 20 percent income tax withheld as a refund after you file your tax return). Don't let your employer give you a check, because you'll have to use your own money to finish your rollover.
Taking a lump sum distribution is not usually a good idea because you will have to pay income tax on the money and a 10% penalty if you are under 59 1/2. But there may be times when a taxable distribution is a good idea. If you want to buy a $300,000 boat and spend the rest of your life sailing around the world, you may need to take your retirement money now and pay taxes. But if you don't spend these funds right now, you might have a nest egg when you're older.
