People are starting to find jobs now, slowly but surely.? So, after signing their employment forms, dusting off their desks, and arranging their photographs, the last thing on their minds are their orphan 401(k) or 403(b) accounts.? Often, these balances are left behind at former employers, and soon forgotten.
As hard as it may be to be reminded of your former employer, it is best to act right away to establish control over your retirement assets.? Here are several options to consider.
Cash Out
We strongly advise against this option. You will be subject to ordinary income tax rates on the entire balance. And, if you are under age 59 ?, you will also have to pay a penalty tax of 10% on these balances.? If your past employer requires you to cash out, redeposit the amount in a retirement account within 60 days to avoid being taxed as indicated.
Do Nothing
This is the default option, particularly if the former employer is willing to continue holding the account without additional charges.? This is a good choice if you do not yet qualify for a 401(k) at your current employer. The concern is that you may indeed forget about this account, and fail to monitor these investments closely.? Sometimes, plans fold, and the proceeds could be distributed outright to you by check, with all the tax implications described above.
Rollover to Your Current Employer?s Plan
The advantage here is that your retirement assets are all in one place and easier to manage.? Employer-sponsored plans limit fund offerings to those approved by the administrator.? Though you are provided with funds that are reviewed for your benefit, you lose the flexibility of having the unlimited choice of investments that an IRA rollover will provide (see below).? Check the fees that you will be paying within the plan. Review administrative charges as well as fees taken within the mutual funds offered to get a comprehensive view of costs.
Rollover to an IRA Account
IRA (individual retirement account) rollovers can be administered by brokers, mutual fund companies, or banks.? Brokers provide a broad array of choices, including individual securities, mutual funds, and certificates of deposit (CODs).? Mutual fund companies will limit choices to their proprietary funds.? Banks offer a variety of savings vehicles and mutual funds, and for larger accounts, provide investment management services as well.?? Another currently popular option is a so-called ?self-directed IRA,? offered by specialist custodians.? These firms allow the investor to participate in more esoteric investments like private companies, residential and commercial real estate, promissory notes, and tax liens.? In all cases, verify the minimum balances required, custodial fees, commissions, and transaction fees prior to making a choice.? If considering a self-directed IRA, tread carefully.? The IRS rules are complex, the costs high, and the investments are generally illiquid (meaning they cannot be easily converted to cash) and riskier than publicly traded securities and mutual funds.
Next Steps
After you have made a choice, find out what forms your former employer needs to transfer the account.? Do the same with your current employer or IRA custodian.? Keep in mind that transferring your account may not be a high priority with your former employer, so follow up regularly to gauge progress.
Bottom Line
Regardless of age, we will be increasingly responsible for funding our own retirement.? So choosing wisely now is essential to making sure our ?golden years? are not tarnished by a lack of funds.? To quote George Foreman: ?The question isn?t at what age I want to retire, it?s at what income?.
Ina Fernandez has over 20 years of investment experience, and is Managing Director at Liberty Capital Management, Inc.
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About The Author
Ina Fernandez
Ina Fernandez CPA is Managing Director of Liberty Capital Management Inc., an independent investment advisor. She has over 20 years of investment experience and holds a number of volunteer leadership positions, including Board President of COTS (www.cotsdetroit.org) and Board member of the Michigan Womens Foundation.
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Source: http://www.thrivedetroit.org/i-love-rock-n-rollovers/
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