Of course, you should weigh this option carefully. It's not a sin to tap your retirement money, but it is a bummer. You are removing money from a program where it could be compounding for years on a tax-deferred basis. Compare this step with other options, such as taking part-time work or borrowing from parents.
Now let's look at rollover mechanics. When filling out your instructions for the distribution, always insist on a direct deposit into your IRA. Never accept a check made out to you personally. A check in your name triggers the 20 percent withholding tax, which might make it impossible for you to deposit the full value of your distribution into a rollover IRA. If 20 percent is withheld, you have to find the 20 percent from somewhere else to make the full deposit. A year later, you may get the 20 percent back, but this doesn't help you during the 60-day period during which you have to deposit your distribution into an IRA to avoid the taxes and penalties. Money sent directly to your IRA avoids this problem entirely. Even if you plan to spend some of the distribution, roll it to the IRA first.
You can always access your money on a moment's notice once it is in the IRA. Reliable vendors have toll-free numbers staffed with well-trained retirement specialists. You control the situation and are not held hostage by circumstances back at your former place of employment.
If you are an older employee with a substantial account balance, the message here is the advantage of better investment choices with control over your costs. Leaving, say, $200,000 in the expensive plan could easily be costing $3,000 in annual fees, (the 1.5 percent cost of many 401(k) investments.) In contrast, a group of good index funds or some bonds in your own IRA might only cost $240 and generate far better results.
What if you are over age 591/2 and still employed, but you think your company may let you go? Consider moving your retirement money to an IRA now, rather than waiting until you leave or retire. This is an option in most plans. As you continue to work, you would continue to make deposits into the company plan, but roll the accumulating amounts periodically into your IRA.
Remember, we have probably five times more money in these plans thanks to tax savings and automatic salary withholding than we otherwise would have had in any after-tax investment program. Knowing that these flexible choices exist should only prompt us to contribute as much as we can possibly afford and then a little bit more. It reminds me of an 85-year-old fellow swimmer, Fred, who said his secret to winning long distance races in his youth was to start by swimming as hard and as fast as he possibly could. "Then," he said, "I would gradually increase my pace."
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