Don't Cash Out!...Rollover Your 401k!
Business consultant Hewitt Associates looked at the behavior of 170,000 401(k) participants who left jobs last year. The review shows that 46 percent of those changing or losing their jobs took the cash out of their accounts. A quarter of the workers either rolled over their money to individual retirement accounts or other retirement plans and about a third kept the money in their previous employers' 401(k) plans.
The fact that people are cashing out at such high rates does not bode well for future retirees, said Pamela Hess, Hewitt's director of retirement research.
The study also showed that younger workers were more likely to take the money and run. Six out of ten workers in their 20s took a cash distribution from their 401(k) last year, compared with just one-third of employees in their 50s.
Read the update....You need to Rollover your 401k into an IRA.
Wise Owl
If you're facing a job change or you've lost your job and are wondering what to do with the money in your 401(k) account, there are generally four options:
--In most cases you can leave the money with your former employer. You can't make additional contributions but the assets will gain or lose value depending on market activity. Advisers at Charles Schwab Corp. say many people who do this tend to forget about the account, which isn't good. You should monitor it and rebalance the stock and bond allocations occasionally.
--Roll it over directly into your new employer's plan. It's best to do a direct rollover from one plan administrator to another to avoid penalties. The people overseeing your 401(k) at your workplace should be able to tell you how to do this.
--Roll the money over into an Individual Retirement Account, or IRA. Many advisers prefer this option because it gives you more control over your money and more flexible investment options. You can invest it in several different ways including certificates of deposit, mutual funds or a combination of stocks and bonds.
--Cash out the account. Your employer must by law take 20 percent in taxes off the top. If you're under 59 1/2 you'll also be assessed a 10 percent early withdrawal penalty. And if you're in a tax bracket above 20 percent, you'll still owe more taxes.
Simply stated, you can lose as much as half of what you've saved through taxes and penalties. As a result, this is an option that should be very thoroughly considered before doing it. In addition, you're losing the earnings you might have gained if you'd left the money in the account throughout your working life.