Financial Planning for Generation X & Y Women
 
Notice: Because of a database server upgrade, this site may be partially non-functional from August 21st to August 22nd. No data will be lost. We apologize for any inconvenience.
Under slight reconstruction until 5PM CST today... Please excuse the dust!
Resource Center
Expert Q&A Archive Teleconference Call Archive Online Resources Federal Reserve Board Resources FPA Perspectives
Error — no()

Expert Q&A Archive

06/19/2009
Which is better, to roll over my 401(k) from a previous employer, or pay down debt?
I have just over $10,000 in a 401(k) in another state (I moved 4 years ago.) I've been advised to roll it over into an IRA and not to take from it, despite my debt of over $20,000. How do I do this? What steps do I take?
Gary Silverman, CFP®:
expert info »
There are several issues here. The easiest is the mechanics of rolling over the IRA. The best way is what is called a "Direct Rollover" or "Trustee-to-Trustee Transfer." To do this, you'll need to open an IRA account where the money is going to go to. You'll fill out a form provided by the 401(k) provider to have them roll out the money into the new IRA. Sometimes the forms are a bit confusing, so if you get stuck, see if the place you're opening the new IRA at can help you with them.

But the mechanics are the easy part. What you need to decide is 1) how are you going to invest your money (e.g., what investments are you going to buy with it), 2) where are you going to invest your money (i.e., a broker, mutual fund, insurance company), and 3) who is going to advise you on the first two. The advisor can be you (through self-learning), a firm’s sales staff, such as at a brokerage or insurance company, or an independent financial planner or advisor working for fees or on an hourly basis.

As to whether to roll the money over or take it out, pay the penalty (I'm assuming you are under 55 years of age), and pay off you debt is more complicated. Either through self-study of the issue or by seeking the services of an advisor, you'll need to consider the type, tax-deductibility, and interest rate of the debt; the rate at which you are currently paying the debt down; your general income and expense situation; along with your tax bracket. One warning: if the advisor you seek the advice from earns their living by you investing money with them, their natural bias will be to have you not pay off the debt. That way they make money with the investments. While I hope that most advisors will warn you of this conflict-of-interest and still give you the proper advice, you may want to consider seeking the services of someone working on an hourly basis to make the debt vs. rollover decision. This would probably cost several $100's.
Rosemary Ervin, CPA:
expert info »
I will assume the $10,000 is still with a former employer (in another state). If you are no longer working for that employer, you have several choices:
• You can leave it there if the former employer is willing to keep it;
• You can roll it to a new employer (if you have one) and the new
employer has a 401(k) plan with a provision to accept rollovers; or
• You can roll it to an IRA rollover account held by you.

You should not take any distributions from retirement accounts until you are 59 1/2. There are limited exceptions, but paying off debt does not relieve you of the penalty imposed on retirement plan withdrawals before age 59 1/2.

If you are over 59 1/2, it is permissible to take the distribution, but you will pay tax on whatever you take out of the account. Go to www.irs.gov, click on “individuals,” and look at “retirement plans.”

Consider other avenues to pay down the debt, e.g., earn more and spend less. It's like dieting and exercising at the same time. Not easy, but it will get you results.
Jane Callahan:
expert info »
You can call any brokerage firm, such as Fidelity. They'll walk you through the transfer process, which is very simple. They'll actually do it all for you. They will also be able to explain (as should your tax accountant) the tax penalties for early withdrawal from your 401(k). You'll have to weigh those penalties against the interest rate you're paying on the debt, along with your options for paying it off.

Start with a couple of phone calls to brokerage firms and compare their fees. Good luck.
Wendy Weiss, Ph.D.:
expert info »
1. If you decide to move your money from the 401(k), you will need to move it to another institution, like a brokerage or a bank. Contact the new institution or its broker and a) request the forms needed to "roll over" your 401(k) and b) open a new IRA account to receive and hold your retirement funds. You, or a broker that will advise you on the account, will complete the forms for you to open the new account and roll over the old one. Be ready to provide a copy of a recent statement from your 401(k). That will have the account number of your 401(k) (so that a back office can verify the information) and the name of the institution that holds it, and a rough idea of the amount of money you will transfer from one institution to another. That back office will process your request.

2. NOW, you must know that the investments (mutual funds, bonds and stocks) that you hold in the 401(k) will be sold before the money will be moved. You will not get taxed on this, but you must be prepared to receive the amount of money that reflects the market value of your 401(k) on the date it is sold.

3. The institution will SEND YOU A CHECK for the full amount (and close your old 401(k) account). You will have to mail that check or bring that check to the new institution for deposit in the new IRA. IMPORTANT POINT--do not cash this check in your checking account. Just bring it over within 30-60 days of receiving the check and deposit it into the new IRA account. Why not just cash it? Well, you will get taxed on a portion of the IRA plus pay a 10% penalty. (There is a trick, but I don't advise doing this. You only have to deposit that same amount in the IRA within the allotted 60 days to make sure you don't have to pay penalties and tax. But you may have a lot of paperwork etc to justify your actions. My advice: walk the entire check to the new institution and deposit the whole thing into the new account. Good luck.

So that is the way you do it. Now let's turn to why.

Why a Rollover IRA and not a 401(k)?
1. If you have left your old employer, you are legally allowed to take money from the 401(k) offered by your past employer and ROLL IT OVER to an IRA. Or you can just move the same funds to the 401(k) at your new employer. You decide if you want to consolidate it or leave it with the old employer etc.

2. You have more options in an IRA than a 401(k). A 401(k) allows you to select among a small set of mutual funds for investment. That can be good if the mutual funds are good. But an IRA allows you to select from a broader set of investments, not limited to mutual funds. You can select stocks or bonds, etc. etc.

3. You can continue to contribute to your 401(k) at your new employer AND contribute to your IRA too. So you will be putting more money away for your future.

4. IRAs and 401(k)s allow you to save and grow your money over the long term, and gain financial security. Both are investments that can grow. AND YOU ARE NOT TAXED ON THE GAINS. You can't take the money out without penalty until you are 59 1/2 years old. But HEY, that just keeps you on track.

So take advantage of your 401(k) at work and your IRA. Roll over your 401(k), if you want, but make sure you contribute as much as possible to your new 401(k) (try to contribute the maximum each year if you can) and, if possible, add money to your IRA each year. That is one way to build wealth and your financial security.

And remember what the Duchess of Windsor said—“You can never be too rich, or too thin.” Forget the thin part. Go for the rich part!!!!!

Michael A. Masiello:
expert info »
Rolling over your 401(k) is pretty simple. Most investment companies have paperwork to complete and they will [do the] roll over for you. Hopefully you are working with an advisor and not attempting to do this alone? Also, pay down that debt from cash flow by cutting budget areas and applying all available money to that debt. The usual concern/problem with using retirement money for debt reduction is that it could cost you 50% in taxes and penalties. Moreover, the money won't be there for later, and many folks just run up more debt and now are worse off. Sorry the medicine isn't tasty, but it works. Good Luck.
Rachel Lane, CFP:
expert info »
Rachel Lane
In order to roll your old 401(k) into an IRA, first you would establish an IRA somewhere, perhaps at a no-load mutual fund company like Vanguard or Fidelity. Then you would contact your old employer, the plan administrator (name and number should be on your most recent 401(k) statement), and tell them that you want to make a direct rollover of your 401(k) to an IRA--a trustee-to-trustee transfer. They may be able to do it over the phone or they may send you paperwork to fill out.

The most important thing is having your 401(k) plan administrator make the check payable to your IRA custodian for your benefit, but not to you directly. Otherwise taxes and penalties may apply.

Hope this is helpful!
Gail V. Marquet:
expert info »
You will need to find a financial advisor in your area. Many local credit unions offer this service. They can have you complete the paperwork to roll the 401(k) into an IRA and help guide you in choosing investment vehicles for this. It is extremely unwise to cash in the 401(k) instead of rolling it [over]. You will pay a 20% penalty for taking the cash and about another 20% in taxes, meaning you will lose 40% of the money currently invested.
Gerri Detweiler:
expert info »
I agree with the advice you've received. I, too, recommend you roll your 401(k) balance over into an IRA rather than cashing it out to pay your debt. If you do cash out your account early, you'll pay taxes and penalties and have just a fraction of what you need to resolve your debt. In addition, money held in retirement plans is almost always protected from creditors.

Any investment company can tell you how to roll this balance over to an IRA. It should be very easy. The company that holds your 401(k) may also be able to help, provided you are happy with their fee structure and investment options. You may need some help deciding how to invest the money, and if that's the case, make sure you find a company that provides the service you need, or talk with a fee-only financial advisor.

As for your debt, I'd recommend you start by talking with a non-profit credit counselor if you haven't done so already. It's a good place to start.

Good luck, and I hope you'll be able to turn things around.
Bettye J. Banks:
expert info »
The reason you do not want to take the funds out of an existing 401(k) involve a tax hit and penalty. When you take the money [out] you will have taxes taken out before you receive any funds. You may not have enough left to adequately service your debts.

If you have not reached the age of 59 1/2 you also pay a stiff penalty for early withdrawal.

Rolling the funds over into a tax-sheltered product makes sense. You need to talk to an investment professional to help you make a decision. If you are currently employed and have a retirement program at work, ask your provider for advice on transferring the old account.

You will need:

1. The name and address of the company currently holding the account
2. A contact person at that company, if you have one
3. The amount of money in the account
4. The account number on the account
5. Your Social Security number and possibly other personal data

Regarding your debt: Many, if not most, creditors will work with you in arranging a payment plan to liquidate your outstanding debts, especially in these troubled times.

If you do not feel confident in making arrangements with them on your own, contact an affiliate agency of the National Foundation for Credit Counseling (800-388-CCCS (2227), the oldest and most respected of the non-profit credit counseling agencies. They will refer you to an agency near to you.
H. David Whalen:
expert info »
Yes it would be important for you to roll over your previous retirement account into your own IRA (Individual Retirement Account) and not take any monies directly. If you do take it directly, the US Government will want 20%, and if you are under 591/2 there will be a 10% penalty.

Regarding your debt, you need a written strategy on reducing your debt in an organized, strategic manner. Establishing a written budget is a good start toward managing your debt and future spending. Good Luck.
Kim Nourie, CFP, CPA:
expert info »
Dear Wi$eUp Reader: Congratulations on having set aside some retirement monies. It sounds like you have changed employment and have left your 401(k) monies in your prior employer’s plan. If this is the case, contact the Benefits Department at your former employer and ask them for the paperwork you need in order to review your options and roll over your 401(k) balance. The other step you need to do is determine where you want the 401(k) funds to go. Some options you have are 1) consolidating them with another IRA account you may have previously established, 2) transferring them into your new employer’s 401(k) plan, and 3) opening up an IRA with a financial institution. It sounds like you may also benefit from some professional advice, so you might consider working with a CFP® practitioner (find one in your area by going to www.plannersearch.org) or another qualified financial professional. Going forward, a general rule of thumb when you have debt and are trying to pay it off (your personal situation might be different from a general situation, though) is to participate in an employer-sponsored retirement plan to benefit from any employer matching. Then, delay additional participation until you have paid off your debt. Good luck!