So you have finally found a new job. Congratulations! Maybe you could. “moved on to explore other opportunities.”Whatever your decision, what are you going to do now about your life? old 401(k)?
According to estimates, there are approximately 15 million of these. “orphan”Former employees may have left behind accounts due to confusion about the rules or inertia. The IRS won’t let you procrastinate on a crucial decision. You have 60 days to move the money into another tax-advantaged account, if you withdraw any amount.
* Option No. 1: Cash Out
This is not a good idea unless you are in serious financial trouble and absolutely need the money to survive. As Sarah Walsh, vice-president of retirement solutions at Fidelity investments, notes, this will not only result in a loss of potential portfolio gains. “you will have just given the IRS a huge chunk of the money you’ve been saving for years. That’s money you won’t have for retirement.”
How is that possible? You have to withhold 20% of your federal income taxes. Your state taxman might also want a cut. “early-withdrawal penalty”Slamming those below the age of 59 1/2.
Oder, you can use Fidelity’s example (www.fidelity.comLet’s say that you are a 36-year old who raids your $50,000 savings account. You’d have $32,500 after federal taxes and penalties.
* Option No. Option 2: Transfer the money to your employer’s plan
Double congrats to your boss if he or she matches any of your new 401k contributions.
It could be a good sign. But, keep in mind that not all firms will accept rollovers. If your plan does accept rollovers, the big question is: Does it have investment choices that you like?
* Option No. 3: Roll the Money Into an IRA
You can avoid the tax consequences of cashing out, just like the previous option. These could be significant advantages. IRAs provide more investment options than the standard 401(k) and you can make withdrawals without penalty for qualified education expenses, or for first-time home purchases up to $10,000.
“The rollover process is relatively easy,”Walsh. “And if you already have other accounts elsewhere, it may be simpler and more effective to consolidate under one roof.”
* Option No. 4: Leave It With Your Ex-Employer
For those 55 years and older, penalty-free withdrawals are permitted. However, some people forget that an account exists. Additional contributions are forbidden.
No matter what your decision, keep in mind that the clock could be ticking to get back to your old 401k administrator.