THE BIG ROLLOVER – What do I do with that old 401(k)?
Neal A. Deutsch, CFP®
Published in Rivertown Journal, December 2007
It is a fact that in today’s business world, changing jobs and/or occupations
is commonplace. As we are diligent about saving for retirement (you are diligent,
aren’t you?) we usually make it a point to enroll in the company’s
401(k) plan as soon as we are allowed. While we are clear in the fact that
saving within our 401(k) plan is a great conduit for saving toward retirement,
most folks are not clear as to the rules and options about moving the funds
out of the 401(k) plan.
Options, options, options...
There are many misconceptions about what may be done with your 401(k) funds
when you leave a company. Some people think they have to cash out their 401
(k) upon leaving a job. Others think they must "roll it over" into
a new 401 (k). Still others believe that they must leave the 401 (k) where
it is. None of these are true ... and none are false. These aren't "musts"-
they are options. The big question is, which option is the right option
for YOU?
If you have enough money in your current 401 (k) to meet the minimum requirement,
you could leave your money where it is. Should you? Well, it depends. If you
feel the plan has good investment choices and the annual fees are reasonable,
leaving your money there to mature could be a good option for you. Remember
though- you will be limited in investment options to those available in the
existing plan.
Direct rollover into a new 401(k)...
If your new employer offers a 401(k), you could choose to "roll" your
money into that plan, but then you will be limited to the new plan's investment
options. So should you? Once again, it depends- you'll want to look into the
structure of the new plan, the fees and the investment options.
Moving the money into an IRA rollover account...
If managing where your account is held and how it is invested is important
to you, this option gives you a greatest amount of flexibility. It also offers
you more distribution options, once you are age eligible. Additionally, you
could open a brokerage account or purchase a CD, provided the account is titled
as your IRA Rollover Account.
Cashing out your 401(k)...
The temptation to get a lump sum of money can be too great for some, especially
if they have just lost their job or feel that they are in some sort of financial
bind. They may choose to cash out their 401(k) upon leaving a job. But what
are they giving up? Well, 10% for starters. If they are younger than 59-1/2
years old and cash out their 401(k), most of them will incur a 10% penalty.
Additionally, they will owe taxes on the amount they cash out. But here's what
really hurts: they are giving up part of their retirement fund or (in many
cases) starting over from zero.
Fighting temptation now could lead to big rewards later...
For example, let's say a 35-year-old leaves a job and rolls over $15,000 from
a 401(k) into an IRA earning an average of 7% annually, letting the money mature
over 30 years... by the time of retirement, that money could potentially grow
to over $100,000.
Making a decision …
If you're unsure which choice is
best for you, or if you'd like to learn more about your options, I would recommend
speaking with a qualified financial advisor. Additionally, you may want to
consider working with a tax professional if you own company stock in your previous
401(k). You're likely to want some assistance in sorting through the IRS rules
that may apply. Either way, you can’t
go wrong by saving diligently for retirement: it’s you future- make it
a financially secure one!
Neal A. Deutsch is a Certified Financial Planner™, Registered
Securities Principal and President of Chestnut Investment Group in Suffern,
NY, helping people with financial planning since 1984. Please feel free to
call Neal at 845.369.0016 or email him with your questions at neald@chestnutinvestment.com
Feel free to visit his website at www.chestnutinvestment.com
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