What to Do With Your 401(k) When You Change Jobs – New York Times – 10/05/13

The New York Times

Personal Business – Your Money Adviser  – October 5, 2013

What to Do With Your 401(k) When You Change Jobs

By Ann Carrns

More than half of workers in their 20s who have 401(k) plans cash out their holdings when they change jobs, partly because their balances are relatively low, according to a report from the benefits consultant Aon Hewitt. Only about a third of those who change jobs in their 50s do the same, according to the report, which examined 1.8 million participants in 110 large retirement plans.

Say you have $10,000 in your retirement plan, and you cash it out. You’ll pay a 10 percent federal penalty, or $1,000, for taking an early retirement withdrawal.

And, because the money was put into the account on a pretax basis, the total amount is subject to income taxes — about $2,500, based on a 25 percent marginal tax rate. So you’ll net just $6,500 — and possibly less, when any state taxes and penalties are included. But the real impact comes from the longer-term, tax-deferred investment you will lose out on.

Comments October 5, 2013

Many 401(k) plans allow you to rollover your 401(k) account into an IRA even if you are still with the same employer through a tax free rollover called an in-service withdrawal. All 401(k) plans allow you to rollover your 401(k) account on a tax free basis into an IRA once you terminate employment. Rolling over a 401(k) account to an IRA can have huge advantages.

Many 401(k) plans offer only 10-20 investment choices, with many of those choices limited to the 401(k) vendor’s proprietary target date funds. Furthermore, they lack important fund choices, such as: international developed and emerging market bonds, high yield and convertible bonds, mid-cap and high dividend stocks. If they are offered, investors are forced to pick from the one or two funds the plan offers for that type of investment objective – even if those funds are mediocre.

Once you rollover your assets to an IRA you gain access to thousands of investment choices without trading restrictions. Furthermore, you can convert a part or all of your IRA account to a Roth IRA account. This can provide additional tax and estate planning advantages.

After rolling over your 401(k) account to an IRA consider having your portfolio professionally managed by a privately owned Registered Investment Advisory firm, legally obligated to accept fiduciary duty and place your interests before shareholders or any other party – without conflicts.

Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group

Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies.  He can be contacted at www.skloff.com or 908-464-3060.

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