When employees leave their job for a new opportunity or to retire; many are left with an important question: what should I do with my 401(k)?
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Fidelity says if you’re the average person, you have more than $100,000 tucked away.
Ric Edelman, founder and executive chairman of Edelman Financial Services, says making the wrong choice could negatively impact your financial security in retirement. Edelman shared the four options for workers when they leave their job:
Leave it where it is
One option is to leave your 401(k) with your former employer. Edelman says this is not a great choice. As a former employee, you are a low priority for them. As fortunes change in their world, they might go out of business, they might merge with another company or they might cancel their plan.
Whether you left on good or bad terms, you will always be connected with your former employer. If you move, you need to update them on address changes or you won’t receive important correspondence related to your plan. As the years pass and you change jobs, you may also forget you have the account. The Government Accountability Office reported from 2004 through 2013, more than 25 million participants in workplace plans separated from their job and left at least one retirement account behind.
Move it to your new employer’s plan
In many cases, your new employer will offer a retirement plan. If you have the option, you can transfer the money from your old plan into the new one. Edelman says moving the funds will not only keep your money close to you, you’re also less likely to lose track of it. But there is a downside. He says your new employer’s plan may be limited in investment choices or it may be expensive. Research the pros and cons of moving your 401(k) before making the decision.
Roll funds into an IRA
Edelman says rolling your funds into an individual retirement account (IRA) is the best choice for a lot of employees. Moving funds into an IRA will give you complete control over your money. You can decide how you want the money invested and you won’t have any restrictions or limitations your employer might have. He says moving retirement funds into an IRA doesn’t cost anything and when you do it correctly, you won’t incur any taxes.
Not only is cashing out your 401(k) the worst idea, it’s the most common. Edelman says if you ask your employer to write you a check, they will do it, no questions asked. He says what people end up doing is squandering the money and spending it on current or frivolous expenses. The next thing you know, the funds are gone and not available for your retirement. By taking a lump sum distribution, you miss out on the opportunity to have your money grow in a tax-deferred account.
What’s more, if you are under 59 ½, you will have to pay taxes and a 10% penalty. Edelman says when all is said and done, you may end up losing about 40% of your retirement savings! He says when leaving a job, if you’re not sure what to do with your 401(k), don’t be afraid to ask for help.
“For a lot of people, this is new and different,” says Edelman. “Many folks have never experienced this issue of leaving their employer and dealing with their retirement account assets. Working with a financial planner who is skilled and experienced can be of tremendous help to you making the right decision.”
Linda Bell joined FOX Business Network (FBN) in September 2014 as an Assignment Editor after more than a decade at Bloomberg News. She is an award-winning journalist/writer of business and financial content.
You can follow her on Twitter @lindanbell.