Being retired is stressful enough, but thinking about the life after retirement is more stressful as it involves the thought of how you are going to handle a leftover 401(k) plan.
You will be worrying over what to do with it, whether to roll it over, leave it alone or to take the money and run.
Many employees do not understand what rolling over is all about. Rolling over involves transferring any and all previous employer retirement plans to an individual retirement account. And this is what you should do immediately so that you can have total control over your funds.
If you leave it with your employer, his company will have 100 percent control over it. A company 401(k) limits investments to 25 choices because this is what fiduciary standards require so as to offer a set standard of quality. This may not be bad but it results in few varieties in terms of asset allocation and risk profile.
It is also better to transfer your fund out of an employer plan because such plans are more expensive than having an individual retirement account. This is because the employer has to pay fees to a third-party administrator, an advisor and the providers; all these costs will be transferred to you.
You get a better return if you are not paying these fees. And if something happens to you, it would an easier process if you are dealing with your own account rather than involving your former employer.
The only advantage that you may have by not rolling over is that if you quit, retire or you are fired when you are 55 and above you may withdraw 401(k) funds without penalty provided you have not reached 59 ½ years.
Be careful with withdrawals
Liquidating all or part of your 401(k) can be tempting but is very dangerous and costly. You will be charged a 10 percent penalty for early withdrawal if you are below 59 ½ in addition to income tax that is charged on the amount you have withdrawn. The amount withdrawn may also push you to a higher tax bracket resulting in higher taxes.
So don’t be tempted to withdraw money. If you are pressed moneywise now, it will be worse in your retirement so you better find other alternatives rather than withdrawal.
If you take loans from your 401(k) while you are still employed, you will be paying back interest to yourself. It is very easy just like you would get a loan through a bank without qualifying.
But if you are terminated, you must pay the whole amount back failure of which it will become a taxable distribution. There will also be a 10 percent withdrawal penalty if you are under 59 ½ years of age.
Drop in income is helpful for tax planning and the period of unemployment is a great opportunity to be in a lower tax bracket. This is therefore not a time to withdraw as it will bring you back to the tax net.