Imagine that it's finally the last day of your full time career. You've worked hard all these years and you are finally calling it quits. The morning went smooth while you said all your goodbyes. The farewell lunch was filled with laughter. Now it’s 3:30pm, almost time to make the drive back home one last time.
As you are thinking about whether you've missed anything, you find a biggie: your retirement plan at your employer. You need to figure out where you are going to put your assets. Here are your options for an old 401(k).
1. Leave your money in your existing plan. This is certainly the simplest of all the options available, but only if your plan allows you to do this. By not touching your 401(k) plan you are still allowing your money to grow tax free. But before you just leave everything as it is, decide whether you are happy with the 401(k) plan. Are the investment choices and guidance that this plan allows adequate? Is withdrawing money easy? How flexible are the distribution options? Does this retirement account align well with your estate planning?
2. Roll the assets over to a new plan. Many people dream about the day they retire. But a sizable chunk of our population continues to work part time or consult after we give up our full time career. If you will be working with a different employer, another option is to roll your current retirement plan over to the new plan. Again, make sure the investment choices available are ones you are comfortable with. Moving everything over to the new plan has the added benefit of keeping things simple.
3. Take the money out. Most likely the worst option for you is to take the money out immediately. You will owe federal and perhaps state income tax on the distribution. And if you retired young (before age 55) you will be hit with a 10 percent penalty too. The money you take out also won't grow tax deferred for years to come, which means a higher tax bill year after year. After age 70 ½ retirees are required to begin taking withdrawals from tax-deferred accounts.
4. Roll assets into a traditional IRA. A traditional IRA is a great choice for someone who wants flexible investing choices. IRAs give you the broadest range of investment choices, allow you to change your investments at any time, and some plans even offer professional investment guidance. However, flexibility isn't always a good thing. An infinite number of investment choices can be confusing. While you can always find an investment adviser to manage your traditional IRA, some people may be better off sticking with the target-date fund in their 401(k.)
What will ultimately work best for you is based on your personality. Before you call it quits, give your 401(k) some thought. You've worked this hard for so long. Don't be lazy now.
David Ning runs MoneyNing, a personal finance site aimed at helping others change their habits for a better financial future. He suggests that everyone to sign up for an online savings account to get more out of our hard earned money.