Four options for your 401(k) when you leave work.Like what you hear? Help us out by writing a review at iTunes. Questions go to money@qdnow.com. Thank you!
Money Girl
133 MG Job Changes and Your 401(k)
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That's who we are. Hello and welcome to Money Girls, quick and dirty tips for a richer life. I'm Laura Adams. Lately, I've received several emails from listeners who are wondering what they should do with their 401(k) retirement savings after they leave a job. Here's a question from a listener named Ben. I need some advice on my 401(k) account. I'm in my early 20s. I just resigned from my job and moved to Asia. I wonder what's the best thing to do with my 401(k) account. I only have about $1,000 in it. Thanks, Ben. I appreciate your question. One of the great features of workplace retirement plans, such as the popular 401(k) is that they're portable. That means you can take your money with you when you leave a job. Before I give you the options for what to do with your 401(k) money, I'll give you a brief overview of the three different types of 401(k) plans. The type of plan you have, the terms of the plan document, as well as how much the investment has gained or lost will determine the actual amount of money that you can take with you. The three different types of 401(k)s are the traditional, safe harbor, and simple plans. Each one allows an employer to deduct money from your paycheck before taxes are taken out and send it to your retirement account. All three 401(k) types also allow your employer to contribute money to your account. That could be done as matching funds or profit-sharing funds, for example. So let's discuss how the three plan types are different. With a traditional 401(k) an employer can create a vesting schedule for the contributions they make to your account. Vesting schedule is simply a timeline that shows how long you have to work for a company before you're legally entitled to the money they've contributed for you. A typical vesting schedule could be something like 20% after two years of service, 40% after three years of service, and on up to 100% after six years of service. So let's say you've worked for a company that has this vesting schedule for two years. During that time, you contributed $2,000 and your employer contributed $1,000 in matching funds. No matter what type of 401(k) you have, you're always fully vested in the money that you contribute from your paycheck. So you would be allowed to take your money, $2,000, plus your vested portion, which is 20% of $1,000 or $200. So that totals $2,200 plus any investment gains or minus any investment losses on those amounts. So much of what we want to do can seem impossible, but the highest achievers among us are the people still striving, still reaching for something. It's those people who approach the impossible and embrace it. There's a vehicle for people like that. It's called the Defender. 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Planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but PolicyGenius makes the process a breeze. With PolicyGenius, you can find insurance policies that start at just $292 a year for a million dollars of coverage. Some options offer same-day approval and avoid unnecessary medical exams. PolicyGenius' technology lets you compare quotes from America's top insurers in just a few clicks to find your lowest price. It's the country's leading online insurance marketplace. And if you ever need help or guidance, they have an expert license support team to answer your questions, handle all the paperwork, and advocate for you throughout the process. It's never too late to plan ahead. Go to PolicyGenius.com or click the link in the description to get your free life insurance quotes and see how much you can save. That's PolicyGenius.com. Buying a home is one of the biggest financial decisions you'll ever make. Before you tour home, the real estate professional you're working with may ask you to sign a buyer's agreement, which describes the services you'll receive, each party's role and responsibilities, and how your agent will be compensated, all of which you'll want to discuss with them, up front. So, work with an agent who's a real tour. Real tours are members of the National Association of Real Tours with a duty to honestly represent you and put your interests above their own, because that's who we are. The second type of 401(k), the safe harbor plan, is similar to a traditional plan except that it doesn't allow for vesting schedules on company matching. Some planned documents may implement vesting for profit-sharing funds, however. Matching contributions provided by the employer are fully vested when they're made, therefore an employee can consider them safe. No matter how long you work for a company, with a safe harbor plan, you are entitled to 100% of all company match funds, in addition to your own funds, plus or minus investment gains or losses. For both safe harbor and traditional 401(k) plans, an employee can contribute up to $16,500 for 2009. For those aged 50 and older, you can contribute an additional $5,500. The last type of 401(k) is the simple plan, which stands for savings incentive match plan. However, it actually is a simpler plan for an employer to administer. Paperwork requirements and regulations are greatly reduced as compared to those of traditional and safe harbor plans. Simple plans were created especially for smaller businesses with fewer than 100 employees. The trade-off is that it offers the least financial flexibility for the employer because they're legally required to make contributions for all eligible employees. It's similar to the safe harbor plan because the employer's contributions are always fully vested. The maximum you can contribute to a simple 401(k) for 2009 is $11,500. And if you're 50 or older, you can contribute an additional $2,500. Now, back to Ben's question about what to do with your 401(k) when you leave work. Once you're no longer employed by the company, there are four options. They apply whether you resigned, got laid off, or were dragged out by office security. Two of the options are great, and two of them are terrible. I'll start with the terrible ones. The worst option for your 401(k) money is to leave it with your old employer. That's because companies can radically alter their retirement plans, or even go out of business, and you won't be in the loop about what's going on. You might need to leave your money there for a short time, but it's never a good idea to let someone else control your money any longer than is absolutely necessary. The second bad option for your 401(k) money is to withdraw all or a portion of it out of the plan. If you make a non-qualified withdrawal before you reach the official retirement age of 59 and 1/2, you'll have to pay income tax plus a whopping 10% penalty on that amount. Unless you're facing a severe financial crisis, in which you have no other option but to withdraw your 401(k) money, it's just not worth it. If you land a new job that offers a retirement plan, a good option is to do a rollover from your old plan into your new one as soon as you become eligible to participate. But if you don't have a new job in sight or if you'll be self-employed, the best option for your 401(k) is to do a rollover into an IRA or individual retirement arrangement. That's what I'd suggest for bin. It's easy to open up an IRA through an online brokerage, such as etrade.com or ingdirect.com. But it's important to do a retirement rollover correctly. Breaking the rules means having to pay steep taxes and penalties. So join me again next week when I'll give you more specific information and tips about doing a retirement plan rollover correctly. Also, be sure to enter the Nutrition Diva Birthday Sweepstakes for a chance to win one of eight awesome prizes, including gifts from SodaStream, custom-designed energy bars from ubars.com, and free books. Just go to the Nutrition Diva section at quickanddirtytips.com. But hurry, winners will be drawn on August 1st of 2009. I'm glad you're listening. Cha-ching. That's all for now. Courtesy of MoneyGirl, your guide to a richer life. There are any number of reasons you might consider selling your home. To move closer to family, live within a smaller budget, or just running a change of scenery. Whatever your reasons, having to figure out all the various housing market trends in your area may not be what you signed up for. That's where an agent who is a realtor comes in. Realtors have the expertise to help you find the right price and navigate the process to sell your home in a way that's right for you. That's who we are. Realtors are members of the National Association of Realtors. Earning your degree online doesn't mean you have to go about it alone. At Capella University, we're here to support you when you're ready. From enrollment counselors who get to know you and your goals, to academic coaches who can help you form a plan to stay on track. We care about your success and are dedicated to helping you pursue your goals. Going back to school is a big step, but having support at every step of your academic journey can make a big difference. Imagine your future differently at kappella.edu. [BLANK_AUDIO]