Have you just started a new job at an employer that thinks you are as visionary and innovative as Steve Jobs? Perhaps you’re in between gigs. “exploring other opportunities.”You have to decide what you will do with your old retirement plan.
There are approximately 15 million accounts like this, which have been left behind by ex-employees. This is primarily due to confusion or inertia over strict rules for moving money. You don’t have 60 days to make a decision. The IRS won’t allow you to procrastinate on a crucial decision.
* Option No. 1: Cash Out
This is not a good idea unless you are in serious financial trouble and absolutely need the money to live on.
“Cashing out comes with an immediate price, both in terms of giving up potential future gains in your portfolio and in the IRS taxes the company handling your 401(k) for your former employer is legally obliged to withhold,”Nupur Bahal (Vice President for Retirement at Fidelity Investments), explains. “That’s money you won’t have for retirement.”
Yes, the government should get its share. Specifically, federal income taxes are 20 percent, and an additional 10 percent for an “early-withdrawal penalty”For people under 59 years old?
Fidelity’s website, fidelity.com, uses this to translate that into real money. hypothetical exampleThe story of a 36 year-old woman who decides she wants to cash out her $16,000 account balance. After subtracting the federal taxes, penalties and interest, she would be left with $11,200.
Imagine how much more you could make if you had a bigger account.
* Option No. 2. Transfer the money to your employer’s plan
What’s known as a “A” workout “rollover”This is a great way to keep your 401k savings together and grow tax-deferred.
Be aware that investment options can differ from plan to plan, as well as fees. Rollovers are not always accepted by all employers.
This means that you may want to compare prices before you commit.
* Option No. 3: Move the Money Into an IRA
You can cash out as usual, but you won’t be subject to the tax consequences. These are the major advantages of IRAs. IRAs not only offer more investment options than the traditional 401(k), but also allow you to withdraw penalty-free for qualified education expenses and up to $10,000 for a home purchase.
“Especially if you already have other, non-401(k) accounts elsewhere, it may be simpler and more effective to consolidate everything under one roof,”Bahal.
* Option No. 4: Leave It With Your Ex-Employer
People who are 55 or older can withdraw their funds without penalty. IRAs — or unique investment options might just be worth letting things roll. Some people forget that the account is still there after the passing of time. Further contributions are not allowed.
No matter what you do, the clock is ticking to remind you to call your old 401k administrator if you want to withdraw even a dime.
