History

• In 1978, Congress made changes to the IRS tax code that enabled the creation of 401k deferred compensation plans. The rule change meant companies could pay part of an employee's salary into a tax-deferred account. During the 1980s, many companies began to offer 401k plans as alternatives to more expensive fixed pension plans. After the collapse of Enron in 2002, the government restricted the amount of compensation that employers could pay in the form of company stock.
  
  

Time Frame

• The IRS allows employees over age of 59 1/2 to roll over funds held in 401k accounts to other qualified retirement plans. People wishing to start taking income from 401k accounts can do so at that age but are subject to income tax on withdrawals. People under the age of 59 1/2 can roll previously rolled employer-contributed funds and earnings out of their current 401k plans and into traditional IRAs.
  
  

Benefits

• People benefit from in-service withdrawals because they can explore more investing options. Most company plans limit investment choices to 10 or 12 mutual funds. Most 401k plan custodians assess annual fees of 2 percent or more. Many plans use front-load mutual funds that cost 4 percent or 5 percent to buy into. Conservative investors can roll funds into certificates of deposit that are federally insured. Other people can roll funds into low-cost no-load mutual funds.
  
  

Considerations

• Although no-load funds charge no up-front fees, they do charge annual 12b-1 fees and assess other charges related to fund management, administration, sales and exchanges. Mutual funds with up-front load fees often pay larger dividends than no-load funds. Someone with a 401k plan invested in front-load funds loses the long-term benefit of higher dividend income by rolling it elsewhere, and you cannot recoup fees already paid. People who hold company stock in 401k plans often receive preferential tax treatment if they hold it until retirement. Employees should consult tax professionals before selling and rolling over the funds.
  
  

Warning

• People who withdraw funds from 401k plans must reinvest the money into a qualified retirement plan within 60 days or the IRS views the withdrawal as income and it is taxed. The Federal Deposit Insurance Corporation covers IRA accounts up to a maximum of $250,000 per person, per bank. Employees with large balances rolling money out of 401k accounts to gain the benefit of FDIC insurance have to make partial rollovers to several banks to gain full FDIC protection.