Moving a 401(k)

When you move on to another job, what should you do with your 401(k)?

Kevin McCormally: I am Kevin McCormally of Kiplinger's and I am here with Mary Beth Franklin, Senior Editor of Kiplinger's Personal Finance magazine to talk about 401(k)'s. Mary Beth, a lot of people now have got lot of money in their 401(k)'s and it is still a mobile workforce. What happens to my 401(k) when I switch jobs? Mary Beth Franklin: Well, you have three choices; you can take it with you and bring it your new employer if you want, you can put it in individual retirement account or you can even leave it with your old employer as long as your balance is at least $5,000. Kevin McCormally: Which one do you think is the best idea for most people? Mary Beth Franklin: Well, it depends; if you want the most in investment choices, you would probably roll it over to an IRA and there are two ways to go, you have got a universe of stocks in mutual funds or if you want the super easy fix-it and forget it, you can put all in your money into one target date retirement fund. Kevin McCormally: When you say 'roll over', do you take the money to the new one or do you need to do that direct deposit thing? Mary Beth Franklin: What you want to do is to have your old employer send the check directly to your new IRA custodian or to your new employer. Kevin McCormally: Okay and why is that? Mary Beth Franklin: Because if you get your hands on that money, Uncle Sam will take 20% off the top. You have 60 days to roll that money over but that's the 20% you do not have, you have to put back in, it can a real mess. Kevin McCormally: And what about, somebody, you have left out one option I think, which is actually taking the cash. Mary Beth Franklin: You can take the cash, not a good idea for most people; unfortunately, about 40% of workers who switch jobs do take the cash. Kevin McCormally: And what happens? Mary Beth Franklin: Big tax penalty. They will be paying taxes at their ordinary income tax rate; federal taxes, state taxes, and if they are younger than 55, an extra 10% penalty. You could easily loose half of your distribution to taxes. Kevin McCormally: So when you move jobs, move that IRA money to another tax shelter? Mary Beth Franklin: Absolutely. Kevin McCormally: Thank you very much.