Armchair Millionaire Advises On Doing Rollovers Right
It's a fact that most Americans will change jobs at least several times during their careers. It's also a fact that the burden of providing for retirement rests squarely on your shoulders. When you're moving to a new job, don't torpedo your retirement by cashing out your 401(k).
New York, New York (PRWEB) September 20, 2005 -- When it comes to their 401(k)s, far too many people take the money and run when they change jobs. A study this summer by Hewitt Associates of nearly 200,000 workers found that almost 45 percent chose to cash out their 401(k)s when leaving jobs. Given the hefty tax bill and 10 percent penalty these workers will pay on this cash -- not to mention all the lost returns had they left that money invested -- this is rarely a wise move.
When we asked members of the Armchair Millionaire community about whether theyve cashed out their 401(k)s, we heard that some had -- and regretted it. Here are two comments we heard:
I cashed out my 401(k) and I do regret it. My home needed some major repairs and I was leaving my job all at the same time. Although the money came in handy, I wish I could have found another way." --Diane
I cashed out back in the 1980's when my company was downsizing. I was young and dumb, didn't know much about 401(k)s, debt or retirement. I am NOT glad I did it. I now realize that I could have been 100 percent financially better off if I had kept my money there!" --Marie
If you avoid the temptation to cash out and decide to keep your 401(k) money invested, you have three choices:
1. Roll it over into a traditional IRA. This means simply moving your money from your 401(k) to an IRA. You will continue to enjoy tax deferral on your retirement savings and will avoid penalties and taxes.
2. Keep it with your old employer. As long as you have at least $5,000 in your account, you can usually leave it in your former employer's plan.
3. Roll it over to your new employer's 401(k) plan. Most plans allow you to do this.
Because it offers maximum flexibility in investment choices, I believe that your best long-term choice is to rollover your 401(k) funds to an IRA. If you choose this route, my guide will show you how to do your rollover right.
The Armchair Millionaires Guide to Doing Rollovers Right
| | - Set up your rollover IRA. You can do this with any mutual fund company or brokerage service. Look for a wide range of investment services, low costs, responsive customer service and online access.
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| | - Request a direct rollover. Ask your employer to send your 401(k) funds directly to your IRA account. (Technically, this is called a trustee-to-trustee transfer.") Definitely do not have the money sent directly to you. Your employer will be required to withhold 20 percent of your balance (which you wont get back until you file your next tax return) and you will be required to deposit that money plus 20 percent into the IRA within 60 days. If youre not able to make up that missing 20 percent within 60 days, the IRA will treat that money as a taxable withdrawal, which will be subject both to taxes and a 10 percent penalty.
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| | - Make your investment choices. Once the money is in your account, youll decide how its invested. As always, your choices should be guided by common sense asset allocation that is appropriate for your time horizon and tolerance for risk.
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| | - If in doubt, ask questions. Both your HR department and the financial institution where you have your IRA should be able to answer any questions you have at any time during the process.
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The Bottom Line
Its a fact that most Americans will change jobs at least several times during their careers. Its also a fact that the burden of providing for retirement rests squarely on your shoulders. When youre moving to a new job, dont torpedo your retirement by cashing out your 401(k).
THE ARMCHAIR MILLIONAIRE WEEKLY SURVEY: Financially speaking, whats the best way to shoot yourself in the foot? Log on to www.armchairmillionaire.com and let us know.
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Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at www.armchairmillionaire.com.
CONTACT INFORMATION:
Lewis Schiff
Armchair Millionaire
877-833-2823
http://www.armchairmillionaire.com
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