An interesting article on Yahoo’s finance site mentions some tips for you to use if you’re switching jobs where 401ks are involved. 401Ks can be a tricky, sticky mess, since they’re such heavily restricted accounts because of their tax exemptions and other relative freedoms. You’re not allowed to withdraw from them without accruing a multitude of fees in the form of taxes intended to dissuade individuals from touching the accounts before the time that the government expects one to retire. With all of these limitations in mind, it can be a frightening prospect to switch over your 401ks, but the article brings up some good points to put one at ease:

 

3 Cut-Offs to Keep in Mind

If you have over $5,000 in a particular 401k, your former employer is legally obligated to let you leave it in that very same account until you turn 65, this according to David Wray quoted in the article. However, if you have less than $5,000 (but more than $1,000) your former employer has the option to put the money into an IRA that it can open for you. This can cost you a bit, as it’s reported to the IRA and is an inheriting of the funds on your part from the bank. If you have less than $1,000, your employer is allowed to simply withdraw it and write you a check to the amount withdrawn. This is a potentially risky option since, if your money isn’t deposited into an IRA or other retirement, tax-exempt account within the 60 day time frame, then the money will be subjected to taxes and penalty fees, leaving you with very little.

 

Risk vs Reward

Even if you do have enough money for it to be kept in the current 401k plan, you may still want to rollover the funds into an IRA or into your new employer’s 401k. According to the article, you can do this by asking for a trustee-to-trustee transfer, which places the responsibility for your employers to transfer the funds directly. This is the best option, but it’s not always one that’s readily available. Sometimes you’ll simply end up with a check in the mail. If you do this, you’ll be under the 60 day time-limit mentioned before, or risk being hit by early withdrawal penalties and the standard taxes. However, the amount you’ll receive will not be the full amount you might be expecting. 20% will be withheld for tax purposes by your employer in most cases. This means that you, as an individual, will have to put that 20% in from your own income. That money can be considered as tax-deductible, and you can get it back, but, for particularly large sums, that 20% can be a hefty amount out of the reach of most people.

The benefits of these risks, however, can be large. 401Ks are large, grouped investments which provide benefits to those who prefer not to think or invest too heavily in their money. By being grouped, they can worry less about fees and expenses, and because the funds are managed conservatively by experts, there’s little fear of “losing everything”. However, for more money savvy individuals, rolling over old 401ks into an IRA will allow you to personally manage your funds and possibly allow them to grow more. There are definitely risks associated with it, beyond simply the risks involved with the transfer of the funds, so you must weigh these against your predicted rewards.

 

A lot of aspects of changing jobs can be uncomfortable. You don’t want to make mistakes that cost you money, and your retirement options should be just as important as any immediate financial situation. If you consider all of your options carefully, however, then you can make the best decision for you and your money, securing a better retirement for the future.

 

Source: How to Protect Your 401(k) if You Leave Your Job (finance.yahoo.com)