I know speed is not my strength. I’m concluding this series over a week after it was started, but that’s the way things are. Last week, I found an informative series by Money Magazine providing tips for managing your 401(k). The articles reminded readers to save early and often, spread your money around, limit company stock, and check in once a year. Here is the final tip for making the most out your retirement account.
One of my coworkers started her job at my company earlier this year. She came from another financial services company. While one would think that with this particular background, people would know how best to manage their own money. Not everyone in my industry is so savvy.
She withdrew her entire 401(k) account, about $50,000, instead of choosing another option. After withdrawal penalties and taxes, she only had about half of that left.
I don’t give financial advice to people I work with (or anyone unless they ask, but I’m no expert anyway), and certainly not after the fact. But the fact is she had other better options. Our company has a great 401(k) (but the fund management fees are higher than what you would find in index funds) and very easily accepts rollover from other companies’ 401(k)s.
If she didn’t want to go in that direction, her old company probably would have allowed her to keep her account where it was. According to the Money Magazine article, if she were to have less than $5,000 they might have kicked her out of the plan. In this case, she would have been safe.
A third option would be to roll the account into an IRA. By working with a brokerage that includes IRA accounts, like ShareBuilder, more investment choices would be available. This route may be more expensive as some brokerage have annual or inactivity fees for IRA holders.
Either one of these three choices would have been better than cashing out. I can’t speak to whether she really needed the cash immediately. Perhaps there was an emergency and it was her only choice, but I don’t believe so.
Updated September 2, 2011 and originally published August 3, 2006.