It’s easy to just leave retirement savings in a 401(k) account at a former employer.
In fact, 43% of the 401(k) assets owned by workers who left their jobs in the first quarter of 2008 were still with their former employers a year later, according to a recent Charles Schwab study.
But there are some very good reasons to move that money into an Individual Retirement Account (IRA) or the 401(k) at a new employer.
If you have the choice between an employer plan and an IRA, how do you know which is right for you? Ask yourself the following questions:
When do I want to retire? You can start making regular withdrawals from a 401(k) earlier than an IRA without incurring a penalty. You need to be 59½ to start drawing down your IRA; but you’re allowed to access your 401(k) savings if you leave your job at 55. .
Will I need emergency access to my savings? You can make penalty-free withdrawals from IRAs for several reasons, including medical bills that are more than 7.5% of your adjusted gross income; or to pay college expenses for you, your spouse, children or grandchildren.
How much do I plan to contribute? In 2009, the cap for what you can contribute to your 401(k) is $16,500, or $22,000 if you’re age 50 or older. IRAs allow you to contribute $5,000; if you’re over 50, you’re allowed to contribute $6,000. So if you’re in a position to stash a substantial sum away for your retirement this year that argues for a 401(k).
What kind of investments do I want to make? IRAs typically offer more investment options, including mutual funds, stocks, bonds and certificates of deposit. 401(k) plans usually have a more limited number of options. If you’re not comfortable with the choices your employer offers, that argues for an IRA.