18 November 2018

The Easiest Thing To Do With An Old 401(k)

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Few people work for just one employer over their lifetime, so knowing what to do with your old 401(k) plan when you switch jobs is an important skill.  

You can do several things. First, you can leave the money where it is. There's nothing wrong with keeping money parked in your old 401(k), if your former employer allows it and the costs are low, but you won't be able to contribute to the account.  

You can also roll the funds over to another retirement account, either your own individual retirement account or to another 401(k) plan, if you have one with your new employer.  

While it's fine to leave your 401(k) untouched, Scott Hanson, a certified financial planner and senior partner at Hanson McClain Advisors, recommends rollovers.  

"People suddenly find themselves with four different 401(k) plans," he said. If your address changes, it's up to the employer to keep up with you, but there's no gain in running the risk of losing track of your accounts, which may not stay invested the way you'd like.  

Rollover dos and don'ts  

Don't have the check sent to you. "It makes no sense to do that and there is no benefit," Hanson said. "In fact, it complicates matters."  

First, you'll have yet one more item on your to-do list: making sure you mail the check within the 60 days to a new account, otherwise the government treats it as a taxable distribution. Second, if you don't request the funds precisely as needed, you'll come up short for the amount you want to roll over because of the mandatory withholding.  

"Sometimes people don't read the forms, or they don't trust financial institutions," Hanson said.  

Mistrust and mistakes aside, the problem here is that you'll automatically have 20 percent withheld for federal income taxes.  

Let's say you have $100,000 in your 401(k) and you'd like to move it to a new employer's plan. You'll have 60 days to roll the money over, if it's disbursed to you as a check. "But the check is for $80,000," Hanson said. "So you have to come up with another $20,000 from somewhere."  

Another common mistake is withdrawing the money instead of keeping it in retirement savings.  

The rationalization is that it's no big deal, Hanson says. "Why don't I just take that money out and buy some new furniture?"  

But it is a big deal. "One, if it's distributed in your working years, it's like a bonus, and it's taxed as if you made an extra $25,000," Hanson said, or whatever the amount you have in the 401(k).  

You will pay early withdrawal penalties, as well, if you are younger than 59½, and there is also the opportunity cost when you give up the compounding and income you'd earn if the money stayed in an account. "I view retirement dollars as sacred dollars to take care of your old age," Hanson said.  

Click here for the original article.  

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