Leave Your 401(k) Funds Alone
If you leave your employer, one of your major decisions is deciding what to do with your 401(k) funds. Your worst option is to take a distribution, pay taxes and a penalty on it, and then spend the money on something other than retirement. By taking a distribution, you use your retirement funds and forego any further tax-deferred growth on those assets. In addition, you may incur a large tax bill, since withdrawals are subject to ordinary income taxes and a 10% federal income tax penalty if you are under age 59 ½ (55 if you are retiring). Do not make the mistake of thinking it is just a small amount and will not make much difference for your retirement. Over the long term, even a modest sum can grow to be a significant amount.
You have three options to keep your 401(k) funds in a tax-deferred vehicle until retirement:
• Leave the funds in your former employer’s 401(k) plan. Generally, you can leave the funds in your former employer’s plan if your balance is at least $5,000. However, most plans will not allow you to borrow from your account once you leave the company. Until you consider all your options, you might want to at least temporarily leave the funds with your former employer’s plan.
• Transfer the funds to your new employer’s 401(k) plan. Find out if your new employer’s plan accepts rollovers. If so, you can typically make the rollover even before you are eligible to make contributions. However, first review the investment options offered to make sure the new plan has options that will fit your investment goals. Once the funds are in your new employer’s plan, you will be able to take loans if permitted by the plan. Also, if you work past the age of 70 ½, you won’t be required to take distributions from the 401(k) plan until you retire. With individual retirement accounts (IRAs), you must take withdrawals once you turn age 70 ½, even if you are still working. If you decide to transfer the funds to your new employer’s plan, get the appropriate paperwork from your new employer so the funds can be transferred directly to the new plan’s trustee. Otherwise, if the funds go directly to you, your former employer will be required to withhold 20% for taxes. You must then replace the 20% with your own funds within 60 days or the 20% withholding will be considered a distribution, subject to income taxes and the 10% federal penalty.
• Roll the funds over to a traditional IRA. Again, you should have your former employer transfer the funds directly to the IRA trustee to avoid the 20% withholding described above. Once the funds are rolled over to an IRA, you can invest in a wide variety of investment alternatives. With a 401(k) plan, you typically have a limited number of options. If you plan on leaving part of your 401(k) balance to your heirs, an IRA usually has more flexible options than a 401(k) plan. After the funds are transferred to a traditional IRA, you can then convert the balance to a Roth IRA, provided your adjusted gross income does not exceed $100,000 in the conversion year.
Digg It!, 
Reddit or 
Bookmark it!
