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Archive for Monday, December 7, 2009

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Changing jobs? Don’t forget your 401(k)

December 7, 2009

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In the current economic environment, many people have found themselves displaced from the work force for a variety of reasons. After a new position is obtained or if an extended period of unemployment arises, it is important not to forget about what could be a major portion of your net worth, your 401(k). Company retirement plans such as 401(k) accounts benefit employees by offering a tax-deferred way to save for retirement. In many cases, an employer match of the funds is also contributed.

So what should you do if you have departed from a company but still have a 401(k) with the employer?

Cash out?

Taking a lump-sum cash distribution from your plan may seem like an attractive option. Although expenses and debt can be paid with the additional cash flow, this decision definitely has drawbacks. If you are under age 59 1/2, you will generally have to pay a 10 percent tax penalty for premature distribution unless you qualify for an exception, in addition to the regular tax liability.

Another consideration is that your withdrawal increases your taxable income. This could have serious ramifications the following April. You should consult a tax professional before taking sizable distributions from any retirement plan to avoid an unnecessary tax blunder.

Do nothing

Most retirement plans enable you to keep your assets invested at the plan upon departure from the company. Some employers, however, may require you to take your money out of the plan when you leave. In most cases this occurs if your vested balance is $5,000 or less.

Analyzing the investment selections in your current plan is important to see if they meet your investment goals. If the plan does not have overly excessive fees and the selections are favorable, it can be beneficial to leave your funds where they are. Many people, however, have several jobs over a period of years and lose track of their various retirement plans. It can be difficult to keep all of your assets organized if they are spread across too many accounts.

Roll over to your new employer’s plan or to an IRA

If you have recently started working for a new employer, one option would be to roll over your old 401(k) to your new one. If the investment selections are more favorable or there are other incentives (fees, etc.) that make this option attractive to you then it may be viable.

The final option is an Individual Retirement Account. An IRA provides the same tax-deferred benefits of most employer sponsored retirement plans. Instead of the limited selections in your 401(k), IRAs can offer a broad range of selections to help allocate funds across many asset classes.

A traditional IRA can also be converted to a Roth IRA or serve as an account for future 401(k) rollovers for those who change jobs frequently.

A major benefit to moving your 401(k) to either your new plan or to an IRA is for simplification, but no matter what you decide to do, the important thing is to keep track of it.

Josh McCleary is an investment advisor representative at Berthel Fisher & Company Financial Services, Inc. He can be reached at <a href="mailto:go@ljworld.com">go@ljworld.com</a>.

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