Tech & Work

How to keep your retirement plan on track

As a consultant, you probably field job offers often. But even if a new position sounds promising, is changing companies worth risking your retirement dollars? We'll tell you how to protect your 401(k) when you move to a new firm.


Consultants are a mobile group. A quick look at iBig5.com—a Web site that reports news of the Big Five consultancies and their alumni—proves that the most sought-after consultants are frequent job-hoppers who go where the money is.

If you change companies on a fairly regular basis, your benefits will obviously change, too. If you’ve got money in a 401(k) at stake, how do you ensure that your retirement dollars are secure as you make your move?
A 401(k) plan is a retirement plan in which an employee can elect to have the employer contribute part of the employee's wages to the plan on a pretax basis. These deferred wages are not subject to income tax withholding at the time of deferral.
(Courtesy of the Internal Revenue Service.)
Not all 401(k)s are alike
Because a 401(k) is a company-administered plan, changing jobs will affect the plan significantly. Different companies handle this situation in various ways. Some will allow you to keep your money in the company’s 401(k) until you retire or until age 59 1/2, whichever comes first. Other companies require that you take the money out if you leave. Or you may have the option of making a direct rollover from your old company to your new one, meaning that you never touch the money and that no tax is withheld or owed on the direct rollover amount.

If, however, your new company doesn’t allow this or you don’t find its 401(k) plan particularly attractive, you do have a few other options. “When you leave a job, it’s best to take the money with you,” recommends Jerry Smith, a financial advisor in the Louisville, KY, office of Linsco/Private Ledger, an independent brokerage firm.

Many plans also offer what is called an “in-service withdrawal,” which means that you can withdraw the money from your 401(k) plan and roll it into an Individual Retirement Account (IRA).

Smith pointed out that if you do not choose the direct rollover option and a check goes through your hands, your money can be taxed at 20 percent. If the remaining 80 percent is not rolled over within 60 days to a new retirement account, it will also be taxed an additional 10 percent if you’re younger than 59 1/2 years old.

You can recoup the initial 20 percent if you file a special form with your next tax return, but only if you have also rolled that amount over into a new retirement account within the mandatory 60-day period mentioned above. And, if you enrolled in an employee contribution retirement plan prior to 1986, be aware that some of the rules may be different on those funds invested before 1986. It’s a good idea to get professional help because the rules of the process can be very confusing.

“Frequently, the choice is made to roll a 401(k) into an IRA because [the IRA] is much more flexible and offers the consumer more individual choices, so they can personalize their investments to some degree,” said Smith. He points out that once enrolled in an IRA, the participant is not regulated to the investment choices offered by the company or to any potential future restrictions imposed by his or her employer.

“Basically, you can put your money in different investments without tax consequences,” Smith explained. “We help our clients diversify, and that’s the most important investment, so to speak, you can make for the future. Having all your eggs in one basket is never a good idea.”

Getting the most from your 401(k)
According to MSN.com’s MoneyCentral, getting the most out of your 401(k) plan can spell the difference between creating the life of your dreams or just getting by. Among other things, you should:
  • Assess your goals. Where are you going in your life and career? Do you plan to retire early or work part-time? You’ll need to plan for that.
  • Start early. Time can turn a grain of sand into a mountain. If you invest $1,000 per year at 8 percent interest compounded quarterly, after 40 years, you’ll have a nest egg of $1.4 million.
  • Contribute enough to capture the employer match. Contribute enough to get every penny of your employer’s match; the money is otherwise lost to you.
  • Invest in stocks. A long-term stock investment presents little risk. Sit tight and wait, and you will ultimately reap big dividends.
  • Diversify your holdings. It’s important to select the right mix of asset allocation, such as international stocks, small-company stocks, large-company stocks, and bonds to balance your investment portfolio.
  • Review your account on a regular basis. As market conditions change, you’ll want to monitor your investments to see where performance is weak.

One of the biggest keys to success is to take a look at your investments annually and reevaluate. As mentioned above, if you diversify your assets, you will create a portfolio that has low volatility because of the way these assets offset each other.

We are in the age of the do-it-yourself investor, and we’ve got plenty of helpful resources—magazines, online services, the Internet, etc.—but none of these can tie it all together for your own personal circumstance. “You can try to make your own investments, but without the tools, experience, and knowledge, you’re oftentimes learning from trial and error, and that’s too big of a gamble to take with your future,” Smith warned. “The help of a professional will cost you significantly less in the long run.”
How do you handle your retirement dollars when you change jobs? Is it imperative to work with a financial planner to avoid problems? Post a comment below or send us a note.

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