So many interesting financial questions have been presented to my husband and me in the past few weeks. I mentioned recently that he’s been with his current company for 15 years, working his way from the bottom to as far up the ladder of success as was possible, and now he’s been purchased by another company (it’s a completely amazing and interesting story how that happened, but far too long to share here). His official last day of work for the bank is coming up, and he’s moving on to bigger and much better things.
In the process of finishing up his last week or so of work, he’s had to make some decisions. He’s had to go through insurance paperwork and we’ve had to decide on new family coverage (annoying in that we just did that a few months ago and doing it twice in one year is no fun), he’s had to decide on other financial items, and he’s had to decide what to do with his current 401(k) when he is no longer an official bank employee. It’s an interesting question. I always just assumed people transfer it (roll it over, I believe is the official term) to their new employer, but all the paperwork he brought home from his HR person states that there are a number of options.
If you are in the same position in which you have a new job and are no longer an employee of your old company, if you’ve been fired or you simply quit, you’re going to have to face the same options with your own 401(k). Do you roll it over? Do you transfer it? Do you cash it out? I have read up on a lot of this information over the past few days, and it seems to me that there is a very clear answer. However, I’ll provide you with the facts and let you make your own decision.
Leave it Alone
Did you even know this is an option? I certainly did not. You can leave your 401(k) behind with your former company, but you probably should not. It will just sit there in an account without anything else being contributed to it. You can access it at some point later in your life, but you might forget about it, forget to keep up with it and basically just not handle it with the care it needs. You probably don’t want to choose this option, but it is an option for you.
Cash it Out
This is an option that many people choose, but it’s an expensive one. Just because you are leaving does not mean that you get to take the cash from this account free and clear. For one, it was placed here pre-tax, and the good ol’ people at the Internal Revenue Service want their cut of your money. What this means it that you’re going to pay a withdrawal penalty for taking the funds before you turn 59.5 and you’re going to pay taxes. You’ll pay as much as 20% in taxes and another 10% in fees.
Let’s say you’re still young and your account has a grand total of $15,000 in it. You might think that sounds like enough to top off your down payment on a new house or pay off some debt, but you’re not getting $15,000 when you cash it out. You’ll see that $1,500 of that is taken as a penalty for withdrawing the funds early, leaving you with a cash out value of $13,500. However, you will also see that there is another 20% taken out for taxes, leaving you with only $10,500. That’s nearly a third of the money you saved going to the IRS. Do you really want to go there?
Roll it Over
When you choose to roll your 401(k) over into an IRA, you will see the most benefit. You need an account for it to go into, you need to provide your administrator with the information required to complete a roll-over, and you need to understand you will never touch the funds. That’s a direct roll over – and it’s free.
Of course, you could do an indirect rollover, which allows you to receive a check from your retirement account. You have a grand total of 60 days from the date you close your 401(k) to avoid paying taxes and an early withdrawal penalty.
Basically, you need to sit down and evaluate your financial situation. We can tell you all day long that you shouldn’t cash out your retirement account but we don’t know your financial situation. If you’ve been laid off, for example, you might be willing to forgo a third of your 401(k) savings to help you pay your living expenses while you job hunt so that you don’t ruin your credit in the process. Our job is merely to provide you with the choices and the facts. Good luck!
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