When an employee is contributing to a 401k, they are investing pre-tax income. So when an employee changes employers, they are no longer able to contribute to this account. The funds will continue to perform as a beta investment. But the investor should be interested in taking the money out of the 401k and creating an alpha investment.

If the investor removes the money from the account, they will be billed for the entire tax bill. In the event of being outside of retirement age, they will pay a steep fee on the early withdrawal (10%). This is devastating to the investment and should not be done in any event- even the most extraordinary situation does not deserve this type of withdrawal. Many investors are tempted and there are many circumstances in life, but the act means that you have been over-contributing (as you should have been building other outside investments) and have failed at long-term financial planning. (see 401k).

So in the event of a job change, the investor should roll the balance into another retirement account such as an IRA. There are 2 types of IRAs: Roth and Traditional/Rollover. The Roth is post-tax and the Traditional is pre-tax.

A Roth IRA is generally the ideal secondary retirement account, as the investor can do what they want with it, including keep it, not spend it (no mandatory distributions), access the money prior to retirement, and pass along to heirs. A traditional IRA has many more rules as it is designed to behave more like a 401k. There are mandatory distributions (when you are retired) and it has tax implications when it is being passed-on to heirs.

However, if you try to roll your 401k (pre-tax) into a Roth IRA (post-tax), you will get a large tax-bill, as you are going to have to pay taxes on all of the pre-tax income, to convert it to post-tax income, so that you can get the benefits of the Roth IRA.

So for the average investor, the simplest transaction is to roll your old 401k into a traditional/rollover IRA. That way you are transferring the capital from a pre-tax account to a pre-tax account. Even though the Roth IRA has better upsides, a traditional IRA will suit the average investor just fine.

Then, you’ll want to decide where you want to set-up your IRA, I have a few suggestions and several accounts. Then your 401k custodian will liquidate your funds and send you a check made out to your IRA brokerage, and you have to use this to fund your IRA. Then you’ll want to use my cash flow strategy to build up your investments and maintain your cash, and begin a number of the strategies mentioned here (Free ETF, Minus One Options, etc) to begin actively generating yield and maximizing your gains. These returns will far outpace the mutual funds you left behind….(read more)

LEARN MORE ABOUT: IRA Accounts

TRANSFER IRA TO GOLD: Gold IRA Account

TRANSFER IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA