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Let’s say you’re switching jobs in 2016. What do you do with your 401(k)?
Well, the worst thing you can do it cash it out if you’re under 59 1/2. You’ll pay taxes and a 10% penalty on the proceeds and will deplete your retirement kitty.
Your first option, which is perfectly legal, is to leave the money in your old employer’s plan. Although the money is always yours, where you put it is also your business. Your ex-boss can’t take the money from you at any time.
Why leave the money in your old plan? Let’s say you like the investment options and it’s relatively low cost, that is, the funds within the plan charge you less than 0.50% annually. When you look at your new plan, maybe the set-up isn’t as good.
You also may not have the ability to take out a loan in your new plan. That’s another reason for sticking with your old 401(k). Just be careful, warns Stuart Ritter, a financial planner with T. Rowe Price, many employers have a $5,000 minimum.
Rolling over your 401(k) funds into a new plan is a matter of filling out a form. The transfer shouldn’t take long. Just make sure you have all confirmations in writing, so that you can track the transaction and ensure the money has made it over.
Your decision to move your money into a new plan should be based on betting what your new employer has to offer. Ritter says you should consider:
* The new plan limits investment options to those in the new plan.
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* What are the limits on withdrawals?
* Is there a waiting period prior to moving assets from a former employer’s plan?
* What are the differences in the services offered?
* What are the fees and expenses between your former employer’s plan and the new employer’s plan?
* Generally, rollover contributions to a new plan (if permitted) can be withdrawn at any time and do not have to meet a permissible distribution event.
Don’t like your old or new plan? You can move your money into a rollover IRA. You may have less options, but you could find plans without lower expenses. Generally, companies that offer low-cost mutual- and exchange-traded funds will offer bargain expenses.
But an IRA isn’t a panacea when to comes to improving the flexibility of your retirement account. Ritter notes some drawbacks:
* The Rollover IRA Does not offer loan provisions.
* Generally, you may not make penalty-free withdrawals until age 59½.
* IRA assets are protected in bankruptcy proceedings only. State laws vary in the protection of assets in lawsuits.
* There may be negative tax consequences of rolling over significantly appreciated employer stock to an IRA.
* There may be differences in the services offered, as well as in the fees and expenses, between your former employer’s plan and the Rollover IRA.