Paul Meloan – Vested Interest

“The money in the plan belongs to you, and what you do about it matters.”

 When new clients come to meet with me, I ask them to bring all of the statements of their current retirement plans and brokerage accounts.  They rarely fail to comply.  However, one thing they frequently overlook is an orphaned 401k plan account.
     In the 21st century, people change jobs.  A lot. Frequently they participate in the retirement plan (usually a 401k) with their employer and save money inside the account for retirement.  Then one day, one year or one decade later they move to another job.
     What happens to the money in that old company’s retirement account?  Frequently, nothing happens.  This is when the 401k becomes “orphaned”: sitting alone and unloved in an old company 401k account, waiting to be brought home.
     The money in the plan belongs to you, and what you do about it matters.
     Almost always the best thing you can do with it is roll it over to an IRA.  Moving funds to a Rollover IRA is not a taxable event.  It should cost you precisely nothing.
     What will it do for you?
1.  Allow you to invest your money the way you would like to
2.  Probably reduce the cost of ownership in your account (Funds inside 401k plans are notoriously expensive, but that’s a rant for another day). Costs matter.
     One big exception: if you have the stock of your employer’s company inside the plan, there are special rules that govern what you can do with it.  In some cases, it might make sense to take the stock out before you do the rollover.
     Here is a good description of that if you think it might apply to you.
     What saddens me is that even worse than letting it sit unattended are people who take immediate distributions and view it as found money.  It isn’t: it’s the exact opposite.
     A 30 year-old who leaves her job and takes a $30,000 lump sum out of their 401k will pay income tax immediately (probably $6,000 to the feds, plus a 10% early distribution penalty of $3,000) and now only have $21,000 to invest.  Provided they can grow that at 6% for the next 40 years she will have $216,000.  If she had rolled over the entire $30,000 and invested for the same period at the same rate, the end value would be $308,000.  Oh, and what do you think the odds are she will invest the whole thing rather than spend at least some of it?
     The best thing about this problem is that it is one that can actually be solved.  New Year’s resolutions are notorious for their vagueness (“spend less” or “eat less”) but this is something that can be done once and then not need to be done again.
     At least not until you leave your current job!
     Happy New Year!

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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