Should You Roll Over Your 401(k)?
What happens to the money in your employer's 401(k) retirement plan when you leave your job or retire? It's your call, but be sure that you know your options.
- You can leave it where it is if there's $5,000 or more.
- You can roll it over to an Individual Retirement Account (IRA) - or sometimes into a new employer's plan if the plan accepts rollovers.
- You could take the cash. Big mistake. No debate.
Don't leave your 401(k) behind
It can be tempting to leave your retirement savings in your employer's plan. You don't have to do anything - and that can be a welcome relief from making decisions but things might not work out as well as you think.
First of all, if your account is worth less than $5,000 and you don't tell your former employer what you want to do with it, the employer could select an IRA to roll your account into. Is it likely to be an IRA you would have chosen? Don't bet on it.
If you move on and leave your 401(k) behind, you may be in for a surprise. Many, though not all, plans charge higher fees on inactive accounts than on those to which you're making contributions. You may also find you can't reallocate, but must stick with the investments you were using when you left. True, earnings will continue to accumulate. But you might feel like a second-class citizen.
And, believe it or not, a surprising number of people simply forget about accounts they leave behind.
Rolling your 401(k) into an IRA
A smarter move is roll over your assets into an IRA with the bank or brokerage of your choice. The critical factors in making that decision are the types of investments that are available and the cost of making them.
If you roll over directly from your employer's plan into an IRA, the account's tax-deferred status is never at risk. The transfer itself can take a little time, based on the employer's policy. But it should go smoothly when it happens. It will come as no surprise that you have much more control over the way your retirement savings are invested and that the fees may be lower, especially if you choose your bank or financial institution wisely.
You also control how distributions are handled. You can start taking income when you turn 59½. But you can also wait until distributions are required from a tax-deferred IRA, which is April 1 of the year following the year you turn 70½. That could mean benefiting from 10 more years of tax-deferred growth. It also postpones owing income tax, so you may even be in a lower tax bracket when that day comes.
Don't take the cash
You do have the right to take the assets in your employer plan as cash when you leave your job. But there's nothing to be said in its favor even if you have a real plan for what to do with the money. And most people don't.
Taxes are due on the entire amount when you file your return for the year you took the withdrawal. That could be 35 percent of the total at the federal level, plus more in state tax. If you aren't yet 59½, there's an additional 10 percent tax penalty on the full amount. Uncle Sam will love you.
It's your money
Whether you have $500 or $50,000 in your 401(k), remember that it's your money. You've worked for it, you've earned it, and you're entitled to it -- so don't ignore it. Regardless of when you plan to retire, the sooner you take control of your retirement funds, the better off you'll be.