Old 401(k)s? What to Do
Restored from the Empower Network archive (2011–2017), lightly edited to meet our current advertising standards. Views are the original author’s.
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Hi There, Friends of Freedom:
As is my custom, I was sitting with my morning beverage today
looking through the investment and investor news
getting a handle on what the media might be talking about
that would spook my clients and de-rail them from the plans
we have put together to ensure that:
1. The family is financially protected in the event that they would “die too soon”
2. They are moving into the “cash cycle” and out of the “debt cycle” , and
3. They are set up for financial freedom, never having to worry about “living too long”
The following post
Cramer on Retirement: What to Do With Old 401(k)s
found me. Hmmm… I had to learn more.
Jim Cramer of the The Street wrote
If you’re leaving a job, or worse, suddenly laid off, the last thing on your mind is your retirement account. You mean to get around to rolling your money over into an IRA, but the world has turned upside down and you’re faced with more urgent priorities such as beginning a painful job search or grabbing the best retirement options. No wonder 32% of workers leave their retirement savings in their former employers’ 401(k) plans. Employers love it when you do nothing. The more assets a plan has, including money from former employees and retirees, the easier it is for sponsors to negotiate with plan providers for better terms and lower fees.
But that’s no reason to let them keep your money hostage.
Here are just a few reasons why you should take charge and roll that money over today:
Better investments
“With your 401(k) your investments are limited to whatever the plan offers,” says Judith Ward, a certified financial planner with T. Rowe Price. “With an IRA you can have an account anywhere and you’ve got whatever investment choices you want.”
More choices means you can more effectively diversify your retirement savings and offset the choices in your current employer’s plan by using individual stocks or investments in asset classes such as real estate, commodities or energy that aren’t always available in company retirement plans.
Flexibility
With an IRA you may withdraw money whenever you want to. If it is before you reach age 59 1/2 you may have to pay taxes and/or penalties but you can still get to your money. Employer retirement plans are trickier, says Ward. Often the only way to get cash is to take a loan against your 401(k) or prove you qualify for a hardship withdrawal, she explains.
What’s more, you’re also subject to whatever rules your employer may impose on your 401(k) plan, including how you may take your withdrawals during retirement. With some plans, these rules can get complicated and may affect your income stream.
Tax Diversity
So, have we convinced you yet? If so, you have another decision to make Should you rollover to a traditional IRA or a Roth? Unlike a traditional IRA, contributions to a Roth are not tax deductible. However, you’ll pay no income tax on withdrawals during retirement. With both types of IRAs your earnings continue to grow tax free.
If you roll over into a Roth IRA you’ll be liable for taxes on your 401(k) contributions. Rolling over your entire account is unrealistic for most people because of the huge tax bill. Better, says Ward, to first put the money in a traditional IRA then gradually move a portion of it into a Roth.
That way, with part of your money in a traditional IRA or 401(k), and part in a Roth, you hedge your tax bets. If your income tax rate goes down in retirement, a traditional IRA works in your favor. If rates are higher than you expected, the Roth will help ease the burden.
To learn more, including “The One Exception” and “Dealing With The Paperwork, to read the article in full,
Cramer on Retirement: What to Do With Old 401(k)s
Related Media
1. Cramer on Retirement: Can Master Limited Partnerships Hurt Your IRA? (article)
2. Cramer on Retirement: Individual Stocks Are Right for Your 401(k) (article)
3. Cramer on Retirement: The Trouble With Target Funds (article)
4.
(video)
P.S. I AM Peter Pocklington. One of the things that drives my mission of teaching Main Street families the “ABC’s of Investing” and coaching them along their road to financial independence is to help families make appropriate decisions concerning their money. My investors understand that by learning just a few valuable concepts and taking action to set up a few fundamental accounts their money will work hard for for them. It’s “time in the market” that counts – it’s not “timing the market”.