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2017 401k - Rollover Discussion

March 13, 2017

Are you changing jobs?

Do you have a 401(k) from a former employer?

Have you wondered what to do with it?


There are many misconceptions about what must be done with a 401(k) when someone leaves a company. Some people think they have to cash out their 401(k) upon leaving a job. Others think they must “roll it over” into a new 401(k). Still others believe that they must leave the 401(k) where it is. None of these are true, and none are false. These aren’t “musts”, they are options. The big question is: which option is the right option for YOU?

If you have enough money in your current 401(k) to meet the minimum requirement, you could leave your money where it is. Should you? Well, it depends. If you feel the plan has good investment choices and the annual fees are reasonable, leaving your money there to mature could be a good option for you.

If your new employer offers a 401(k), you could choose to “roll” your money into that plan, but then you will be limited to the new plan’s investment options. So should you? Once again, it depends. You’ll want to look into the structure of the new plan, the fees and the investment options.

If managing where your account is held and how it is invested is important to you, moving your money into an IRA rollover account could give you a great deal of flexibility. It also offers you more distribution options, once you are eligible. Additionally, you could open a brokerage account or purchase a CD, provided the account is titled as your IRA Rollover Account.

The temptation to get a lump sum of money can be too great for some, especially if they have just lost their job or feel that they are in some sort of financial bind. They may choose to cash out their 401(k) upon leaving a job. But what are they giving up? Well, 10% for starters. If they are younger than 59 ½ years old when they cash out their 401(k) they will incur a 10% penalty, unless a special exception applies. Even if qualifying for a hardship distribution does not exempt them from the additional 10% tax. 1

But here’s what really hurts: they are giving up part of their retirement fund or (in many cases) starting over from zero.

Fighting temptation now may, potentially, lead to big rewards later.

For example, let’s say a 35-year-old leaves a job and rolls over $15,000 from a 401(k) into an IRA earning an average of 7% annually, letting the money mature over 30 years. By the time they reach retirement that money could, potentially, have grown to over $100,000.

If you’re unsure which choice is best for you, or if you’d like to learn more about your options, we would be happy to speak with you. Please call a MEMBERS Financial Services Representative, Located at: FirstLight Federal Credit Union.

 

  • MEMBERS Financial Services Representative, Julie Brand: 915-564-3328
  • MEMBERS Financial Services Representative, Phillip Boyd: 915-564-3257
  • MEMBERS Financial Services Representative, Erik Jaime: 575-541-9941

 

1 - https://www.irs.gov/taxtopics/tc424.html [1/4/2016]

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