The lack of financial education and confidence leads to some really ugly decision making. A Seattle Times article caught my attention “3 better options than cashing out 401(k) when changing jobs” because I could think of like 100 better options. Including sticking pins in my eyeballs.
It’s really simple. The IRS levies a pretty stiff penalty for early withdrawal from a 401(k) and you have to pay taxes on the money withdrawn too. While the savings opportunities are great, especially if your company matches your contributions, if you pay a penalty to the IRS you throw much, if not all of those benefits away.
Don’t do that.
It’s so hard to get ahead, to get an advantage when building wealth. 401(k)‘s are a great way to accelerate your wealth building. Why spend all that time building, only to throw it away… when it’s completely unnecessary to do so.
So what should you do?
The article gives you the full set of options (there are 3) — you can keep it with your current employer’s plan, move it to your new employer’s plan, or roll it into an IRA.
There are three reasons I’d roll over into an IRA:
- While 401(k) plans are great vehicles for accelerating the amount you have saved, they’re less great when it comes to investing options. They’re good for accelerating savings because you can save more pre-tax earnings than you could by investing in an IRA directly, and you are often awarded matching dollars. However, 401(k)‘s usually limit your investment choices to a small set of mutual funds. The only way to “un-limit” those choices is to roll your 401(k) over into an IRA.
- I also like the roll-over option because you can choose the brokerage you want to work with, it doesn’t have to be the one your employer has chosen. It’s good to build your own relationships, why let your company get the benefits of the relationship? I have my IRA, along with my regular non-retirement account and my bank account all at the same brokerage as a result of rolling over. It’s easier for me, and I have a good relationship with the bank (Fidelity) as a result.
- Thirdly and selfishly, if you roll-over your 401(k) into an IRA you can create your own Elephant’s Paycheck Blueprint and set yourself up with another paycheck while having fun investing. (Cool, right?)
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