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Post by Dan Greenshields, ShareBuilder President
Nearly 467,000 more Americans joined the ranks of the unemployed in June. If you’re among those who recently lost their jobs, finding a new one is obviously top of mind right now.
During this tough process, it’s important to not lose sight of your 401(k). As stressful and upsetting as it is to lose a job, your retirement savings is still your money. So take action to control your future.
Don’t Cash Out – There Are Other Options
Even in good times, 60 percent of employees who leave their job and take lump sum distributions of their 401(k) don’t roll all of it into a tax-qualified savings account, according to a recent newsletter from the Employee Benefit and Research Institute.
As big a temptation as this is, don’t do it! Money drawn from a 401(k) counts as income on your taxes. And if you’re under age 59 1/2, you’ll be penalized an additional 10% by the IRS. So before “borrowing” from your retired self, take a personal financial inventory.
Review all your accounts — savings, checking, brokerage, as well as any unused available line of credit on your home. You may also own plenty of things that can easily be converted into cash on eBay, like baseball cards, jewelry and other collectibles. One man’s junk is another man’s treasure. Unless it’s your absolute last resort, don’t cash out.
Take Action
Taking no action has consequences. So don’t just leave your 401(k) with your old employer.
If you have less than $5,000 in your 401(k), your employer can cash you out or roll your money over into an Individual Retirement Account (IRA). If you don’t specify a brokerage, your employer will choose one for you.
Don’t let that happen. Take control of your money by opening an IRA or another tax qualified plan such as an annuity and roll your retirement savings into that account.
Choose the Right Home for Your 401(k) Rollover
For most folks, rolling your money into an IRA is the best choice. And it’s also the most flexible. It ensures that your money will continue to grow tax-deferred and that you can continue to build up your retirement. Plus, rolling into an IRA gives you a broader selection of potential investments to choose from.
But not all brokerage houses are created equal. Familiarize yourself with the fees they charge. These fees — including annual account fees, minimum balance fees, administration fees, transaction fees and commissions — can vary greatly and, if not contained, will seriously erode your account’s value over time.
To help your money work harder, look to minimize these fees. Find a brokerage that has no account maintenance fees, requires no minimum balance on your investments and offers competitive commissions. Always ask for a fee and pricing schedule.
Help Your Money Work Harder
Once you’ve chosen a broker and rolled over your 401(k), you’ll need to decide how to invest those assets. Experts generally recommend funds with low expense ratios.
All funds charge fees, usually referred to as expense ratios, to cover fund expenses. Expense ratios typically range from 0.10-2.00%, and are taken off the top as a percentage of the funds assets. These fees are collected whether or not the fund goes up or down. High expense ratios, especially when compounded over many years, can severely chip away at your nest egg.
Typically you can find low expense ratios in Exchange Traded Funds (ETFs). ETFs tend to be very diversified and most are indexed, meaning they seek to achieve the same return as a particular market index like the S&P 500, Dow Jones Industrials or the Russell 2000. Because ETF’s are pegged to an index and therefore not actively managed, they tend to have relatively low expense ratios. There are now over 280 ETF’s offered on just about every index and industry.
It’s Your Money
Whether you have $500 or $50,000 in your 401(k), remember that it’s your money. You’ve worked for it, you’ve earned it, and you’re entitled to it — so don’t forget about it during your job hunt. Whether you plan to retire in 5 or 35 years, the sooner you take control of your retirement funds, the better off you’ll be.
Tags: 401(k), Dan Greenshields, Job, Retirement
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Thank GOD. I am lucky to be surviving with the job at this tough time. But I know how hard to lose a job and worry about income to support the family every month because I experienced in the past. Obviously we look out for easy place to get the money to run the house. But I agree with the post for not dipping into the nest. It is not a wise decision. I wrote an article on how to survive and succeed during the job loss episode. Check it out, it might help save some time and even money. http://www.moneyreallymatters.com/content/job-loss-survive-succeed
Don’t automatically think that you must roll over your 401(k). While the article explains companies’ rights to liquidate small accounts, savers with larger balances can choose to remain in their old employer’s plan. Weigh the costs and investment options of the employer’s plan versus those available via the rollover. This can be quite enlightening and cuts both ways.
The article also missed an important point that can increase your long term tax bill dramatically. If your 401(k) contains your employer’s stock, be sure to read the rules in IRS Publication 575 concerning “net unrealized appreciation” on employer stock before even thinking about a rollover.
I literally have a real beef with the 401K Plans that are out there these days, however I am glad that I did get to enjoy at least some of my money wayyyyyyyyyyy back in 2001. That’s all that I am saying because I don’t know of ANYONE who has retired and had a totally POSITIVE return on their 401K….
You folks who might still have any value left in your Plans might wann take a look at The 401K Help Center….
http://www.401khelpcenter.com