Don't Forget Your 401k (07/12/2016)
When you leave a job, you’re probably focused first on cleaning out your desk and saying good-bye to work friends. Then it’s time to attend to other matters, like what to do with your 401(k). You can’t just throw it in a box, so what should you do?
Handling your 401(k) retirement plan responsibly and avoiding unnecessary taxes and penalties should be high on your to-do list. According to a recent Hewitt Associates survey of employees who changed jobs, 75% decided to either cash out their 401(k) plans or leave them behind with the former employer. Tempting as cashing out your plan may be, that should be a last resort. If you cash out before age 59 ½, you’ll likely be subject to taxes and early withdrawal penalties. If you have a loan against the account, you’ll have to pay that off as well. An investor who is 30 years old and cashes out an account valued at $16,000 will net approximately $11,200 after tax and penalty (assuming 20% tax and 10% penalty). If instead the investor lets the account ride until age 67 with a 4.5% rate of return, the account value would be approximately $81,500.
A better idea might be to move your money to a retirement account that is not tied to your former employer. Rolling over your 401(k) to an IRA could mean lower fees and more varied investment options than those offered by your former employer. The rules governing your retirement plan are largely decided by your former employer. You would have greater control over your account by separating from the existing plan. If your former employer should change or get bought out, you may lose track of how to manage your funds and the requirements involved with making changes or taking disbursements.
Over the course of your career, you may change jobs several times. You may move several times and your employer could also move to a new location. Some people lose track of their paperwork and even forget the retirement savings they have left behind with a previous employer. If you have multiple “old” 401(k) plans, you can roll all of the accounts into one Rollover IRA. By rolling over, you will spare yourself potential administrative hassle in the future. Each plan requires paperwork for the trustee-to-trustee transfer so that your funds transfer directly to your new or existing IRA without penalty or taxation.
Your new employer may allow rollovers from prior plans into your new 401(k), also avoiding taxes and penalties on early withdrawal. You might, however, be better off having a rollover IRA separate from employment. Having only one or two retirement accounts is infinitely easier when planning for retirement.
Choose the option that works best for you, but make it a priority upon your exit.
Lisa A. Dugan
July 12, 2016