Roll it, take it, leave it or move it.
Those are the options — if you’re part of the 8.1 percent of people in El Paso and Teller counties (as of June) who are unemployed, or if you’re changing jobs.
In the interests of being linear — much like no one in his or her right mind would hike Democrat, Cameron, Lincoln and Bross in the reverse order — we’ll start with “roll it.”
Probably the most cost-effective option is to rollover a 401(k) or similar plan to a traditional Individual Retirement Account, said Donna O’Bryant, financial adviser with Edward Jones.
“The most proactive thing to do is to immediately elect to rollover the account and direct the employer’s sponsor plan to send it directly to your personal IRA,” O’Bryant said.
A rollover avoids penalties for early withdrawal — not to mention Uncle Sam’s chomping incisors.
“Everything continues to grow tax deferred,” she said, “and your investment choices are almost unlimited.”
An added benefit is that after leaving an employer, one has the option of later converting part or all of the traditional IRA to a Roth IRA, which, not incidentally, must be done “prudently,” after “consulting a tax professional.”
“Take it” with you — as in cashing out one’s benefit plan — is usually the first thing people think of when they’re under the “financial stress of losing a job. Sometimes you don’t have a choice,” O’Bryant said, “but if you have any other financial resources — you shouldn’t take it.”
Here’s why: “In many cases, the taxes, at 20 percent, and the penalties (for early withdrawal if you’re under age 59 ½) are far more than a year’s worth of credit card interest.
“It seems like the easiest thing to do at the time — but it’s the most expensive thing to do,” she said. “This should be the last money you touch.”
Now, for some mathematics — my son’s forte, but not necessarily mine — the Rule of 72 will illuminate the folly of robbing oneself of, say, $5,000 from a 401(k) to pay off the truck/motorcycle/ludicrously oversized entertainment equipment.
For example, 72, divided by a fixed rate of 8 percent, indicates it will take nine years to double your money. (This is a simplified formula, applied under ideal conditions, mind you.)
Thus, said $5,000, for a 25-year-old, could be $10,000 by age 34, and $20,000 by age 43, and so on and so forth, until it could become $160,000 by age 70.
“Instead of paying off the truck with that $3,500 (the $5,000 less taxes), you could consider it the first step in a life-long pension plan/retirement fund,” O’Bryant said.
Even though you might change jobs several times in a lifetime, “you can accumulate the same as the old days — when people worked 40 years with one employer for a pension — if you participate in every retirement plan available. Pull your 401(k) from each employer and rollover to an IRA,” O’Bryant said.
Option three is “leave it.” This “may or may not be a pleasant situation to deal with your former employer,” she said. “And, if you do that too many times — you’ll have assets in several different employer-sponsored plans, which leaves you rather fragmented.”
Here comes the caveat.
“But if you like the investment options, you’re a self-directed investor and you feel confident in making the (asset allocation) choices, then it is a low-cost option,” O’Bryant said.
Last, but not least (I couldn’t resist saying that), is “move it” to the new employer.
“If you really like the investment choices, moving money to the new employer is an option,” she said. “But — this may be your last chance (if you stay with the employer until the end of your career) to have more money in an IRA.”
And most employer-sponsored plans have limited investment options, versus a personal IRA.
So it’s a good diversification strategy to put some of the money elsewhere, rather than moving money to the new employer.
“When we actually reach retirement, we’re typically carrying a few buckets of money: Traditional IRA, Roth IRA and employer-sponsored plans,” O’Bryant said. “But if every time you leave an employer you use that money to help you get back on your feet — it’s likely you’re not accumulating” much for retirement.
What to do with a 401(k) when switching employers is “a decision that has a long-term impact — even though it’s the last thing people want to think about at the time.
“But it’s your personal pension/retirement plan — no matter where your employment takes you,” O’Bryant said. “You need to pack up your fund and take care of it.”
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.