Starting a new job that doesn't offer for 401k for 1st year - what should I do with money in my old 401k?

Question

I have about $7,000.00 vested in my current, soon-to-former employer's 401k program. I think these are my options - leave it where it is and allow it to continue to collect interest, transfer it to an IRA, where I have more control over the investment options (though I don't think I can continue to contribute funds...?). The third option is cashing out, but I'll get heavily taxed and penalized. The one advantage of cashing out, however, would be that I could pay off $3,000 in credit card debt, and I figure the interest I'm being charged on that is probably more than the interest I'my making with my retirement funds.

Are there other options? Do I understand these three options correctly? What should I do?

Answer 1

You need to do a "Direct Rollover" to a traditional IRA. Go to a discount brokerage like Scottrade (www.scottrade.com) and request the forms for a Direct IRA Rollover. Then contact your old HR rep for the information on who you need to contact to get Rollover information. With these two pieces of information, you will be able to roll over all of your old 401(k) funds into a traditional IRA without having any money withheld for taxes.

The worst thing you could do would be to ask for a distribution. The govt will withhold 20% off the bat, and if you do not get all 100% (including the withheld portion) into an IRA in less than 60 days the outstanding part will be taxed not only at your regular tax rate (or one tax bracket up if you're that close), but you will pay a 10% tax penalty if you are not already 59 1/2 yrs old. It sucks! Never, never do this!

Once you have done a direct rollover (hint, hint), then all of the monies in your 401(k) will be investable in whatever stock, mutual fund, bond, etc that you want for investment!

Never leave your monies with your old employer... I know they offer it. The rollover will protect you from 2 important possibilities-- 1) Imagine if your employer went out of business or illegally mishandled the 401(k) funds (trust me it happens). How (and how long would it take?) would you get your money back? In a brokerage it will be protected by SIPC insurance. 2) You will have *MANY* more options for investing in your IRA.

If in doubt, don't do anything until you talk to a CPA or Certified Financial Advisor. You can always leave the funds alone in your 401(k) until you know what you want to do with them!

Answer 2

You should not give up your tax benefits. Your options will depend on many financial factors. But don't worry, the IRS has given consumers many options when they have to roll over a 401(k). Putting the money in an IRA is not a bad option at all, but you have to consider your needs and look at the differences between Roth IRA's and traditional IRA's.

And you do have several more tax sheltered options other than retirement instruments; like certain health and education vehicles.

I'm a CFP (Certified Financial Planner) in training. I suggest you see a flat-fee board certified CFP and get a financial plan that fits your needs. Alternately you could see an accountant, but make sure they have their Personal Financial Planning Specialist designation from the CPA board


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I'm editing this to be technically correct. For 95% of the population what I said above is true. However everyone has a different financial situation and you can't look at one investment decision in isolation. There /are/ circumstances, such as ones involving high interest debt, where it would be better to cash it out. Its about enhancing your overall efficiency and this is why I think you should get a professional who knows how to put your decision in the framework of Total Household Portfolio Management. That's very important.

Answer 3

Invest... Usually a company will offer a matching contribution (up to about 3%) So no matter what, you want to invest at least their matching contribution... That way you are making a 100% return on your investment technically speaking... A 401k is very flexible, while a traditional IRA is not so much... 401k allows you to take loans out, and the interest paid back goes to you instead of a bank... but there are limits to what you can withdraw the money for... any withdrawal until you are of age has HEAVY penalties, and will wipe out pretty much any gain you had... Most employers have a person you can talk to about your investments... typically here is the path your 401k or IRA should take (but you must actually be making a decent contribution, or you will not be able to invest in all of the funds listed below) You will need to diversify your 401k or IRA portfolio... here is the direction your want to take: Large Cap (Dividends and low growth) Small Cap (Has the ability of posting large gains) International Market (Also has the ability of posting large gains) Bond Fund (Posts larger than normal interest compounded monthly, very low growth) Stock + Bond blend (This is a moderate investment, while posting potentially large gains, it also posts dividends) Once you figure out the percentage (or dollar amount) you want to have taken out of your pay PRE-tax (tax is paid after retirement, taxed as normal income)... your financial advisor will lay down your map which should look similar to the above path... Say you put 10% of your pretax pay, and your employer gives 3%... and the total you invest is just say, $180 per pay check... They will take the $180 and automatically invest it into the above funds... You may have 30% going into growth, 10% into the bond fund, 20% in international markets, and the remaining 40% split between the rest of the funds... You should not be interested in purchasing individual stocks in your 401k, it is very risky, and just wont see the same growth over 40 years... But compounding your savings is the way to go when you are young.... they say that if you invest $10,000 in your 20s... it will make more in the long run than investing $75,000 when you are in your 50s... If you want to save and have a ton of money when you get older, you are on the right path.. and remember, you should save until it hurts... Also if you have a savings account with your local bank, ditch it... they are absolute scams for your money... you should go with an reputable online bank that pays a great % of your post tax income... Local banks may pay around .02% (Thats right... not even a percent!) while most competitive online banks pay around 1.2% or more... and the fed rates are very low right now, and these banks have histories of paying 5% or more. Good luck to you!

Answer 4

By all means, do not cash it out. Resist the temptation for a quick money fix. You can move it to an IRA (Roth or regular) and continue to contribute to it during the year while you are waiting on your new 401k to kick in. Then, just leave it alone and let your money grow in that IRA, and max out the new 401k. It is the best investment deal going and it's some extra free money from your employer.

Answer 5

If I were in your shoes, I'd let it stay where it is for the next year, so there is no hassle on your part and it'll continue to earn interest tax-free. It may be tempting to take it out now, but you'll definitely lose out on some of that hard-saved money, as you're well aware.

However, I had an employer that required I empty out my 401(k) within a certain amount of time after leaving the company. You may want to check with your soon-former employer to see if they have a similar requirement. Some companies just don't want the hassle of managing the 401(k)s of people who don't even work there anymore.

Answer 6

By the sounds of it you are a younger person. In your situation roll it into an IRA find one with a low annual fee. Buy an ETF in the S&P 500, SPY for example , set the dividends to reinvest and forget it.

DO NOT CASH OUT. You will be hit with a 10% penalty which is not woth the difference on your credit card.

I will say though since you are inelligible for 401k contribution until next year use what you would have put into your 401k into paying off your credit card.

Good luck...

Answer 7

Roll it into another fund that you will have control over. No, I don't think that you can contribute to it, so what you also want to do is to start another one, that you will contribute to each pay period. Don't cash it out, the penalties and taxes will negate anything that it earned. I wouldn't leave it with your former employer, you don't work there any more, no one will protect your interests. See a financial advisor if you're really not sure.
Set aside a little extra to work on that credit card debt. You are correct in that you do need to get rid of that as soon as possible.
Good luck.

Answer 8

Leave it there and then roll over to your new 401k when you're allowed to enter.

Roll over now to an IRA.

Your choice. But DON"T take any money as a cash out.'

Answer 9

I would roll it over into an IRA. You should be able to contribute funds continually upto a certain amount. I think the limit is $4,000 for 2006 and you can put in an extra $1,000 as a "catch-up" amount if you are over 50 years of age. Your new company should have a financial advisor that you can use to help you make a more educated, complete decision. My husband and I are currently investing 15% each in our company's 401(K) plans and investing in mutual funds as an aside investment. We haven't decided what to use this one yet, but it can also be saved for retirement as well. In my opinion, you need to spread your money around and not have it all in one place; it is "safer" that way... as "safe" as it can be. Your portfolio will be more balanced that way. Good luck - tough decision!

Answer 10

The best option is to roll over to an IRA. with IRA as you said, there are thousands of options open. With your current 401(k), you had probably 10-20 choices.

Best bet is to rollover to an IRA and enjoy the tax benefits.

Do not take out the money. I am sure you know that if you cash that money, then apart from the regular taxes, you would pay 10% penalty. Is it worth? Think 10 times before you take this step