Dale Suezaki and Taylor Easley are financial advisers at Morgan Stanley, 329-7979.
If you have contributed to your former employer’s 401(k) Plan, you understand the importance of saving and the benefits of this type of investment. Now that you’ve left your former employer and can no longer make tax-deferred contributions, you have an opportunity not only to address what you’d like to do with this particular retirement account, but to review your entire retirement strategy. Even though the best overall strategy is to continue to save, there are a number of options to consider regarding the way you save, and for how long.
Understanding 401(k) options
Once you leave your employer, you have four main choices to consider when determining what to do with your 401(k):
c Leave your money in your old employer’s plan. You don’t have to do anything. You can leave your money in your old employer’s plan and put any immediate decisions on hold. This might appeal to those who do not want to lose the mix of investments they currently have. On the other hand, your investment options may be limited, and you cannot make any additional contributions to the plan. If your account is valued at $5,000 or less, your former employer may roll over your account to an IRA.
c Move your money to a new employer’s plan. You may have the option of transferring the funds directly into your new employer’s plan. Most of the time, the investment options are different, so you’ll need to take a careful look at how your money was invested in your old plan when choosing the mix in your new plan. But you can use this opportunity to choose a mix that is more to your liking.
c Receive a distribution. When you leave an employer, you may consider receiving a distribution from that company’s 401(k) savings. You will receive a check, minus 20 percent federal income tax withholding. Unless employment is terminated during or after the year you attain age 55, withdrawals before age 591/2 are subject to a 10 percent penalty in addition to federal income tax. Plus, the distribution might push you into a higher tax bracket for the year. Finally, if you take and spend your 401(k) savings today you will have less to retire on later.
c Roll your money over into an IRA. A Rollover IRA is designed to defer taxation on distributions until withdrawals begin. Since you pay no current taxes, the rollover account allows the entire rollover amount an opportunity to grow tax-deferred until distribution. When funds are withdrawn from a Rollover IRA, they are taxed at your ordinary income tax rate. This tax deferral can be a very valuable advantage. Also, a Rollover IRA will often offer you greater investment flexibility than an employer’s 401(k) Plan.
These articles are published for general information purposes and are not an offer or a solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives. Morgan Stanley does not render advice on tax or tax-accounting matters.
Dale Suezaki and Taylor Easley are financial advisers at Morgan Stanley, 329-7979.