I appear every Friday with Gina Robison-Billups and Kat Bellucci on a broadcast designed to help working moms create the assets and wealth they need to be successful and secure. This week on MomsMakingaMillion, on 01.22.10, we discuss the first in a segment on what to do with that 401(k) if you have left a job or lost one.
Kat: Last week, on MomsMakingaMillion, Gina mentioned she felt slighted by not having a real job with all of the opportunities for investing that this kind of employment offers. I think you said something like the only difference is being able to pick which 60 hours you work.
This economy has changed a great deal of those opportunities with many of us beginning a new business out of necessity rather than just desire. It would be great to know how someone who had a job with a 401k now becomes a business owner with a 401k – does anything change? Any tax implications? Can you keep the same one?
Paul: That’s a lot to cram into a couple of minutes! We could, if it is okay with you ladies, cover this topic over the next couple of shows. Let’s start with the 401(k) you left behind and then we will move into what to do once you have created your own enterprise.
Kat: Sounds good. So you leave a job, by your own choosing or were forced out, what do you do with the 401(k) you left behind?
Paul: If you decide to leave the money with the former employer, you must first determine whether they will let you. Some plans do not want your money under their management. Others may feel a fiduciary responsibility to other shareholder/investors in their plan and hold the money until the sale of your shares does not impact the others. This would be in the small print of the 401(k) agreement that you didn’t read – in part because you didn’t feel as though you had to.
Not to worry. If your plan administrator puts a hold on those funds, this is probably in your best interest.
Kat: Why would they do that? Seems like they would be willing to jettison any connection to a former employee.
Paul: Selling at the bottom is never a good idea and if portions of the plan has taken a serious hit (perhaps they or you have invested in REITs – real estate investment trusts – and want the market to recover before disbursing any money to you). Leaving them there makes good sense and allows them to better monitor the overall plan’s recovery. But the vast majority want you out.
Kat: What then?
Paul: If you are allowed to rollover those funds, the question is where do you put them? First thing would be to examine the old plan against the new plan. My good friend over a Brightscope, Mike Alfred has developed a tool that allows you to look at your new employer’s 401(k). This is something I suggest you do even if you aren’t leaving or starting a new job or business. On another note, they just developed a new tool to help you analyze the investments in your plan.
Generally, the fees are better in a 401k. Institutions may get a much better deal from the plan sponsor and consideration of this is important in the rollover decision. A much larger plan may come with more options or simply less expensive ones. Fees are an important aspect of total return and a worthwhile item to focus on when making any decision to move.
But you may not have an option if the balance is less than $5,000.
Kat: Really?
Paul: You just don’t have enough invested to warrant the maintenance. So they want to send you packing. This of course doesn’t mean you take the cash as some sort of parting bonus. Of course you will be forced to pony up the 20% payment the account must hold for income taxes and the 10% early withdrawal penalty. The scariest statistic, two-thirds of you take the money and pay those hefty penalties.
Kat: That means they should roll those funds into an IRA. Are there pluses and minuses to doing this?
Paul: Absolutely. On the plus side: It allows closer control of how this money is invested with a variety of considerations weighed with each decision. Not only will this investor spread their allocation over a number of funds, they will do so with an eye on fees and expenses, a consideration of performance of the fund under both good and adverse conditions, and clearheaded understanding of the risks involved. Choices are the primary attraction.
On the downside: IRAs cannot be borrowed against and restrict a penalty-free withdrawal of money before 59 1/2 years old. In other words: You, as an IRA investor are on your own.
Kat: Could we talk about the opportunities facing small business owners next week?
Paul: I would love to!
Paul Petillo is the Managing Editor or Target2025.com
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