I’m resigned and will be leaving my company in about 1 1/2 months. It is very amicable so I have a few options in regards to my 401k - especially since I am not going immediately to a new company, opting instead to take some well-deserved time off.
I want some of my 401k money for myself (just in case I need it) but would like to avoid a lot of the taxes that would hit me if I took a payout. As I see it now, I could:
a) take a loan on 50% of the money before leaving the company and pay it back to myself when I get a new job,
b) anyway, from the Clark Howard site I know that I can transfer all of it, or even the residual amount into an IRA and as long as it stays separate I can roll this into a new 401k plan (but I don’t expect to be working in the USA so that isn’t critical)
c) forget the loan from myself, transfer it all into an IRA and do drawn-downs as I need the money.
d) tranfer it to a money market fund?
If anyone has had experience with this or has seen a good website for info, I’d appreciate hearing from you. AND if you have left a company and know of any other tricks - PLEASE let me know so I can take advantage!!
I know that I will need to talk to my tax accountant but I would like to have a good idea before that.
Even if I had a signature, I doubt I’d have room for it.
The loan isn’t an option if you know you’re leaving. That loophole is closed and the loan will be called due immediately when you quit your job. If you don’t want to give a lot of it to your benevolent uncle S. roll it over into an IRA separate from other funds. If you take any distribution now you’ll pay income tax plus penalty with the possible risk that you might bump into a higher tax bracket and pay even a higher percentage on your whole income for the year.
Option (d) transferring the money to a money market fund probably has an immediate tax consequence and penalty.
Regarding the other options, your “best” choice depends on your personal circumstances (age, salary level, financial security, expected career path, etc), tax situation, and expected future financial needs.
Generally speaking, a company’s 401(k) plan will give you better investment results than an IRA. The company is usually picking up the admin charges, and with most IRAs you wind up paying the admin charges yourself, one way or another. The company will usually provide a selection of funds, having investigated those funds thoroughly for stability, integrity, etc; this would be time-consuming to do on your own (or expensive, if you pay someone – like a broker – to make the investment decisions and the actual investments for you.)
You want to talk to a tax advisor and/or financial planner who knows the tax consequences.
If this is really “just in case” money, then either leave it in the 401(k), or roll it into an IRA. In other words, wait until you’re sure you need it before you touch it. Touching it is bad tax-wise. Plus, the reason for the tax-penalty is a good one. Saving now for retirement is a good idea.
Rolling into IRA vs. leaving in 401(k)
If you roll it into an IRA, you can have much more control over where you invest your money, because you have many choices. With due respect to CKDextHavn, this is my preference. I think it’s good to have choices. Truth is that your company probably didn’t do much research picking out the investment choices for the 401(k); they looked at several providers, such as Fidelity and picked the provider that was in their price range. The investment choices that you get are the choices that Fidelity (or other) offered.
The main advantage I can see for leaving it in a 401(k), is that you may be able to roll that into your next companies 401(k) plan. This could enable you to borrow against the money in a future job. I’m pretty sure you can roll 401(k) to 401(k) or 401(k) to IRA, but not IRA to 401(k). I could be wrong.
I had a 403b and cashed it in when I resigned to start my own business. It was the best decision I ever made.
I never really trusted the whole thing in the first place. The money that I was amassing was only on paper. I figured that I was better off paying 30% in taxes and penalities at the time. It seems to me that as the baby boomers retire and the work force declines, income taxes will skyrocket, not to mention the fact that the supply of money in these plans will decrease quickly.
The thought of watching all of this money amass on paper, only to be heavily taxed when I retire, knowing that the whole thing could disappear overnight at any time, was too much for my comfort level.
Anyone who thinks this growth is going on for ever and we’re all going to retire millionaires has their head in the clouds, IMHO.
I like paying the taxes on my IRA contributions now, not in the future when anything could happen. I know I’ll probably get flamed by some financial “expert”, telling me how silly my way of thinking is, but I sleep well at night.
This is different from investments in stocks, bonds, or money market funds how?
Valid concerns - when the boomers retire there could be a giant sucking sound at the stock market. Then again, maybe not.
It is vital that you be comfortable with your investment decisions, it isn’t worth saving a ton of money if you die of a heart attack from the anxiety. Didn’t your 403(b) come with a money market (i.e. ‘safe’) option? If you can put the money into a safe option in the fund, then you get exactly the same results as if you had it in a money market outside the account except
a) the company may have matched your contributions
b) You get growth on the amount of money you didn’t pay in taxes. The difference is huge in the long run.
Agreed.
I’m certainly not a financial expert, and I don’t think you deserve to be flamed, and sleeping well at night is as I’ve said the most important thing.
I don’t think your way of thinking is necessarily silly, I just don’t understand it. If you contribute to an IRA, you have the same issues as you did with the 403(b) being rolled over into an IRA (can you do that like you can a 401(k)?) - the gains are all on paper, you have to pay taxes on the gains when you retire, etc. The only difference I can see is that you get to earn more money up front because you didn’t pay taxes right away, then you have more taxes to pay later. But remember, you have to make money to pay taxes. How is an IRA better for your peace of mind than your 403(b) was? If you truly believe taxes in the future will be much higher, shouldn’t you keep all your money out of IRAs and pay all the taxes you possibly can now, to avoid paying them later when the rates are higher?
All that aside, if you had a use for the money and are glad you used it, you don’t need the excuses you’ve given above. Just say “The right thing to do for me was to use the money for my new venture,” and no one can disrespect that.
The question of whether the 401(k) is better than the IRA depends on lots of factors. True enough, as Bille says, if you are coming from a small employer who made a “convenient” choice of 401(k) investment manager(s), or where there’s no employee choices, you’ll probably do better with an IRA.
However, larger companies tend to put a great deal of time and money into selection of investment managers who are working with LARGE amounts of money, and tend to do quite well. My (large) company’s 401(k) always does MUCH better than a private investor I use for other investments… and that’s not just the tax-free investment, either.
The advantage to savings for retirement through a qualified (tax-deferred) program like a 401(k) or an IRA is the annual accumulation of earnings without tax. There is also a logic that says that, after retirement, one’s total taxable income is lower than before retirement, so not only does the deferral mean higher savings, but the ultimate tax may be at a lower rate than what one was paying when actively employed.
Granted, if tax rates go up, the argument becomes fuzzier, since it would depend on how far up tax rates go.
Granted also, there are risky investments and there are secure investments and there is a wide range in between. How much risk one wishes to take on is an individual decision that can vary with age and circumstance.
However, the bottom line is that savings is better, in the long run, almost always.
bille says: << I’m pretty sure you can roll 401(k) to 401(k) or 401(k) to IRA, but not IRA to 401(k). I could be wrong >>
Generally speaking, that’s true. However, there are some special cases when an IRA could be rolled into a 401(k), namely if all the money in the IRA came from a qualified plan (such as another 401(k).) That is, an IRA can be used as a conduit to roll money from a 401(k) (for instance) to the IRA, and then to another 401(k).
However, if any money is in the IRA that did NOT come from a qualified plan, then the IRA is contaminated and no money can be rolled over.
