Wednesday, February 19, 2014

Do yourself a favor - keep your old 401k (or 403b)

The temptation is great - you left your job, cash is tight, you have money invested in your 401k - makes sense to cash out the account - right?

NO! Here are four good reasons to leave the money where it is:

1. You will need the money some day in retirement. Money invested while you are young has many more years of compounding growth than if you double up on savings in your 50's.

2. Your 401k is protected from creditors and bankruptcy.
It makes no sense to cash out and then lose the money in bankruptcy or to your creditors. Keep it for yourself.

3. Taxes, taxes and penalty eat away the proceeds.
The money you receive will be taxed as ordinary income (whatever tax bracket you are in) by both your state and the federal government. If you are under 59 1/2 you will pay a 10% penalty.
e.g. $5000 in your plan.
Federal tax 28% + state tax 6% + 10% penalty = 44% X $5000 = $2200.
$5000-$2200 = $2800.
Your $5000 shrinks to $2800. If you leave it to grow $5000 could build to over $8000 in 10 years, $10,000 in 15 years earning a mere 5%.

4. 401k plans usually have better investment choices.
Your company has negotiated for good, diversified funds not always available to the individual investor.

Give it some thought - keeping your 401k will bring rewards later in life.
Be $ smart!