My friend heads a team of people who provide customer service for 401(k) participants from large companies. The end of the year is his team's busiest time because of the number of people who want to take money from their retirement accounts, either as a rollover or as a withdrawal to pay bills.
He and his teammates are prohibited from giving almost any advice to plan participants who call in to initiate the transfer of their money. Even so, he has some good ideas to share. Here are a few:
Know the cost of the move. Most of the time when you leave a company, you don't have to do anything with your 401(k). Your money can continue to sit in your former employer's account, earning interest. Sometimes, your former employer offers lousy investment options, or the fees may be unusually high. But often, the deal that you can get while inside a company 401(k) is better than what you might get outside of it. Before you make a move with your money, consider all the fees. Even a savings on fees of 10 or 15 basis points inside a company 401(k) can add up, especially if the investment options are superior.
Don't take out all of your money. Someone may need only $2,000 or $3,000 to wipe out a bill, but he or she may have $20,000 in the 401(k). The temptation might be to take out the whole thing, feel rich for a while, and worry about taxes and penalties later. As my friend says, it's a bad retirement planning strategy. A better idea is take only what you need and roll the rest into an IRA.
Know where you're rolling. If you do decide to roll, arrange for a direct rollover to the new account before you get on the phone with your company's 401(k) administrator. It will make the whole process smoother, and it will make it less likely that you'll end up blowing your retirement savings.
Ask yourself: Do you have to make the move this year? If you pull money out of your 401(k) before the end of 2013, you'll owe taxes and any penalties when it's time to pay your 2013 taxes in April 2014. If you wait until Jan. 2, 2014, you won't have to pay taxes and penalties until April 2015 -- nearly 16 months from now. In the meantime, you can adjust your withholding to compensate, and that should help mitigate some of that pain.
Is there a better idea? My friend is a registered investment adviser and he hates credit card debt, but he says that sometimes credit card debt is preferable to gutting your retirement savings. If you can figure out a low-interest, no-interest credit card strategy and have the wherewithal and the discipline to make it work for you, you could come out way ahead.
What do you say? Are you still tempted to raid your 401(k)?