401ks Left Behind
During these difficult economic times, many hard working top quality people have lost their jobs. For each and every one, this is a tragedy. While signs of economic recovery have manifested of late, the unemployment picture still looks grim. The number of jobs lost during this recession topped 6 million in the month of June. The unemployment rate, currently at 9.4%, will likely rise to 10%+ before peaking. Unemployment is a lagging
indicator, which means that the economy will be in full recovery before the rate drops.
Unemployment insurance is available to soften some of the financial stress, but financial concerns are just one of many difficult problems the newly unemployed face. Losing one’s job not only causes stress to oneself, but can cause chaos to the whole family. The number of difficult decisions that one must suddenly face is often devastating. Emotional and financial health suffers.
It should be no wonder that many unemployed often forget to rollover their 401k assets into an IRA. A recent study found that in the first quarter of 2008, 43% of those individuals who left their jobs had not moved their 401k assets a year later. This is as important as cleaning out your desk or locker. Failure to do either runs the risk of losing your personal items and funds.
Assets left in your previous employer’s 401k can cost you money. Your 401k could be cashed out, causing it to be subject to income taxes and a 10% penalty. Employers don’t want your 401k. Small inactive 401k accounts lower average account balances, which translates into higher annual fees for employers. Faced with higher fees, employers can cash out ex-employees 401k accounts.
There are a number of more positive reasons to rollover your 401k into an IRA. The first, of course, is control. Unlike a 401k, you are able to have complete control over your IRA account. Second, the investment options in an IRA are much greater than in most 401ks. Your IRA may invest in stocks, bonds, mutual funds, ETFs, annuities, real estate, and more. In addition, you have the ability to change investments as conditions merit or as your personal situations change.
The complexity of rolling over 401k assets into an IRA can cause many Americans to make costly mistakes. Failure to roll 401k assets directly into your IRA without taking constructive receipt is one of them. Often, people will take 401k withdrawals with the intention of opening an IRA later. By taking the 401k proceeds directly (as opposed to having them sent to the new IRA custodian), they inadvertently create a cash-flow problem. The IRA allows up to 60 days for a rollover, any more, and the proceeds are subject to income tax and a 10% penalty. Additionally, the IRS requires employers to withhold 20% of the 401k balance, and the proceeds are made out to you. This means, you have 60 days to rollover 100% of your 401k assets, but you only received 80%. You must come up with the additional 20% on your own. No easy feat for someone who has just been laid off. However, if the rollover is done correctly, there are no withholding or other tax issues.
Your Money Concepts’ financial advisor is here to help. We have the tools, knowledge and experience to help you rollover your 401k assets as smoothly as possible. Our number one goal is to help you by providing the necessary education and information for you to make an informed, thoughtful decision.
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