Dale Ishida Suezaki and Taylor Easley are financial advisers with Morgan Stanley, 329-7979.
We all like to think that we make rational and wise decisions when managing our money. But most of us are influenced far more by our emotions than our brains. Why do smart people make irrational investment decisions so commonly and so easily? The fascinating study of behavioral economics and decision science fills many books, but let’s look at a few of the ways in which investors’ minds play tricks on them.
You’ve packed your belongings, said goodbye to colleagues and made it through your last day at work. The good news is you’re leaving with a sizable retirement plan balance. Care must be taken in handling your assets. With 64.5 million Americans participating in defined-contribution plans in 2004, including 44 million participating in 401(k) plans, according to Profit Sharing/401(k) Council of America in September 2006, you are not alone in deciding what to do with your plan. Your options include the following:
c Cashing Out. Perhaps the least desirable option is to cash out. 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 59 1/2 are subject to a 10 percent penalty in addition to federal income tax.
c Leaving it with former employer. If the account has at least $5,000, many employers allow you to keep your balance in the plan. This may be an option if you like your investment choices or need time to decide your next move.
c Rolling to a new employer’s plan. If you are changing jobs and your new employer allows it, you may roll your money into the new employer’s plan. There may be a waiting period before you are eligible for the new plan. Be sure to initiate a direct rollover or “trustee-to-trustee” transfer to avoid the mandatory 20 percent federal income tax withholding.
c Rolling to an Individual Retirement Account. Perhaps the best choice is to roll over your plan balance to an IRA. You are no longer limited to the investment choices of your old or new employer. You have increased access to stocks, bonds and mutual funds, and increased flexibility in making withdrawals. Be sure to initiate a direct rollover to an IRA to avoid the 20 percent federal income tax withholding.
Articles are published for general information purposes and are not an offer or a solicitation to sell or buy any securities or commodities. People should check with their tax and legal adviser before engaging in any transaction involving IRAs or other tax-advantaged investments.
Dale Ishida Suezaki and Taylor Easley are financial advisers with Morgan Stanley, 329-7979.