Inverness Real Estate Spring-2006 Dollars & Sense: My 401(K) Rollover Options

Remember company loyalty and one job—one career for a lifetime? Those things, it appears, have gone the way of the rotary telephone. In fact, the average American will change jobs every four years and hold 11 jobs during his or her lifetime. This career flexibility has been great for the average employee, raising the standard of living and allowing people to choose the work they enjoy. On the other hand, it has left many people overwhelmed with indecision regarding one key issue:
“What to I do with money in my old 401(k) plan?”

The choices don’t have to be so daunting. Employees generally have these options:

Option 1: Spend it!
Withdrawing the complete balance of your 401(k) plan might seem attractive if you need the cash, but there are serious tax consequences. Income tax and early withdrawal penalties could deplete your account by almost 50%. You will also sacrifice the possibility of future tax deferred growth and negatively affect your future retirement planning. This is a bad strategy!

Option 2: Do Nothing!
This is one of the more popular options as it does not require any action and it can be a wise option if your plan has high quality investment options. You are not allowed to contribute additional dollars, but the invested money will remain in good investments. The downside is that you will have to keep track of changing investment options, adjust asset allocation as necessary and monitor performance. Keeping track of this information along with your other investments and new 401(k) could be very time consuming and you might find yourself buried in mountains of paper. The other negative is that your plan could be heavily invested in company stock resulting in an unbalanced portfolio.

Option 3: Roll Your Plan into an IRA.
If you are looking for more investment options, roll the assets into a good IRA. This option does have the greatest flexibility as you can open an IRA Rollover account that will allow you to invest in almost any stock, bond or other investment product. Just be sure to choose your investment options carefully. A trusted investment advisor can help you do this. An IRA Rollover will also allow you to move the assets to a new employer’s retirement plan in the future.

Option 4: Roll the Money into Your New Employer’s 401(k) Plan.
First of all, determine the quality of the new plan. The managers should have strong long-term track records and lower than average expenses. The plan sponsor should provide most of this information. If it is a high quality plan, this can be the most effective option.

The choices are not difficult, but they do require that you take the time to review the potential benefits and drawbacks of each option. Either options 2, 3, or 4 could be reasonable—depending on your circumstances. Option 1 should be used only in extreme cases and after seeking professional tax advice. Many people choose option 3 given the significant flexibility and the ability to move into a new employer’s plan in the future.
Most important, make an informed decision so that you are confident your investments will be working for you now and as you plan for your financial future.

This material is for information purposes only and is not intended to provide specific advice or recommendations for any individual. Before making any financial commitments, please consult with your financial professional.
Eric M. Freckman is a Certified Financial Planner® with Guillaume & Freckman, Inc. located in Inverness IL and can be reached at 847.934.0010 or eric.freckman@lpl.com
Eric is a Registered Representative with and offers securities through Linsco/Private Ledger Member NASD/SIPC

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