Money Lesson 23 - 401(K)s [Page 2]

When you change jobs, below are your three options:

1. Roll your 401(k) funds over into your new employer's plan

Check with your new employer to see if they offer a 401(k) plan and when you'll be eligible to participate. If there's a waiting period for participation, consider leaving your funds in your old employer's plan until you're eligible under the new plan. Make sure all rollover checks are written out directly to the new plan administrator, not to you. If the check is written directly to you, your plan administrator will deduct 20% for taxes and you'll have to come up with the 20% difference in order to do a complete rollover and avoid taxes. You'll get the 20% back when you file your income tax return at the end of the year, as long as you rollover 100% of the funds within 60 days, but why let Uncle Sam use your money interest-free?

2. Leave the money in your old employer's plan

If you have at least $5,000 in your 401(k) plan, most employers give you the option of leaving your funds in your old plan. As long as you're satisfied with the performance of the investments and administration of the plan, this can be a good option, especially if your new employer doesn't offer a 401(k) plan.

3. Roll the money into a rollover IRA

If you can't or don't want to leave your money in your old employer's plan, and your new employer doesn't offer a plan, you can go to nearly any bank or financial institution and open a rollover IRA. With a rollover IRA, you can invest your funds in virtually any stock or mutual fund.

401(k) Withdrawal

You can start withdrawing money from your 401(k) at retirement age of 59 ½ and you must start taking it out by age 70. There are hardship clauses that let you make early withdrawals without paying penalties; disability is one. If you become completely disabled, you can withdraw early without penalty, or if you are over 55 and have been laid off. Upon the death of the 401(k) holder, the beneficiaries of one's 401(k) will be expected to pay tax on the fund.

Many 401(k) programs will allow you to take out loans for things like education or home purchase on the account and pay them back with interest over a certain period of time. The interest goes back into your account so you don't lose a thing. As long as you keep your job, you normally have 5 years to repay loans, but if you leave the job you have to make the repayment in 30 days, or there are mandatory penalties. Most employers have exceptions for things like medical expenses, emergency mortgage payments or tuition for college.

Marriage makes a difference, too

If a husband and wife take the payments out together and one spouse dies before age 59½ or before they've had the account open for five years, the surviving spouse can adjust the payments based on his or her own life expectancy without penalty.

The annuity distribution can be set up as a one-life annuity or a two-life annuity for married couples. If it's a one-life and the person is 55 years old, according to the actuarial table that person will live an additional 28.6 years. If it's a two-life, based on the life expectancy of both spouses, the table says both will have died within 34.4 years. Simplified, if you have a $500,000 IRA and you opt for the single-life table you divide $500,000 by 28.6 for an annual payment of $17,482.52. Using the two-life annuity, you divide $500,000 by 34.4 for an annual payment of $14,534.88.

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Money Lessons


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