Your Time and Money

your time and money

Orphan 401(k) Plans 
by Minya K. Irby | Living Well | Wednesday, July 17, 2013 

Times are rapidly changing, the days of working “30 and out” or even “25 and out” with one employer is long gone. Remaining with the same employer for longer than 10 years is almost unheard of. The U.S. Bureau of Labor and Statistics reported the median number of years that wage and salary workers remained with a current employer was 4.6. It seems the average American will change jobs 11 times over their lifetime—so what then happens to that 401(K)?

In the event that you change jobs you will be faced with a decision about how to handle your 401(k). As tempting as it may be, especially when we become a little more strapped for cash, the worst decision to make about your 401(k) from your previous employer is to cash it in. Even if your plan has only seen minimum growth, pennies do make dollars, and the goal of retirement is to retire at the income you desire for the rest of your life.  

So what is the smart thing to do? The smartest thing to do is to roll it into the 401(k) plan of your present employer. Rolling your orphan 401(k) into one offered by your current employer will save you money in regard to fees and it will give you borrowing ability a traditional IRA won’t allow.  The rest of the contributions that you will make going forward in that employer-sponsored plan should not exceed the maximum amount your employer is willing to contribute, not a penny more.  

However, in the event that you are uncertain about your length of unemployment, you want to rollover to a traditional IRA or a Roth IRA.  Unemployment may last for a couple of years, and in that scenario, spending the money will seem less like a temptation and more like a necessity. Remember, that 401(k) represents savings-time you will not be able to get back, and the closer you are to retirement, the less time you have. You would be forcing yourself to start over, and adding unnecessary pressure to catch up and grow quickly. Unfortunately, when it comes to investing your money wisely, there is only time and discipline; there is no magic growth formula.  

When making the rollover to a traditional IRA or a Roth IRA, you must consider the different tax pros and cons. Will my rollover come with a tax bill? Can I afford to absorb that tax liability? This is where you want to have the conversation with your team—accountant and financial advisor.  They will help you understand the difference between taxable growth and non-taxable growth. If you make the smart and wise decisions about your orphan 401(k) plan, you retirement will weather the storm of job change and unemployment.  

Photo credit: Roman Milert

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