|One of the most important questions you face when
changing job is what to do with your 401(k) money. Making the wrong move
could cost you thousands of dollars or more in taxes and lower returns.
Letís say you put in five years at your current job.
For most of those years, youíve had the company take a set percentage of
your pre-tax salary for your 401(k) plan. Now that youíre leaving, what
should you do?
The first rule of thumb is, itís wisest not to touch
The worst thing employees can do when they leave their
employer is to withdraw money from their 401(k) plans and then keep it.
If you decide to have your distribution paid to you,
the plan administrator will withhold 20% of your total for federal income
taxes. So if you had $100,000 in your account and you wanted to cash it out,
youíre already down to $80,000.
And if youíre not yet 59 1/2, youíll get a 10% penalty
slapped on for early withdrawal. So now youíre down another 10% from the top
line, to $70,000.
Then at the end of the year, youíll have to pay the
difference between your tax bracket and the 20% already taken out. Thatís
because distributions are taxed as ordinary income. For instance, if youíre
in the 33% tax bracket, youíll still owe 13%, or $13,000. Now your cash
distribution is worth $57,000.
Thatís not all. You might have to pay state and local
taxes. After all that, you could end up with little over half of what you
had saved up.
Whatís more, if you decide after 60 days to roll over
your remaining balance, the government wonít let you.
When you cash out, you take that hit (from penalties)
and you shortĖchange your retirement savings.