newjerseynewsroom.com

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

When leaving an employer, the very worst thing to do with your 401(k) plan, of course,  is to take out the money and spend it. Not only will you be undermining your future retirement; you might also be forced to pay a 10 percent penalty on the amount withdrawn (if you're under 59½).

The really hard question is: Should you keep the money in the 401(k) (assuming that you have permission from your ex-employer) – or roll it over into an Individual Retirement Account (IRA)?

I consulted a very sage lady, Sheri Iannetta Cupo, CFP, who runs the SAGE Advisory Group in Morristown, and her answer was: "It's usually best to roll over your old 401(k) into an IRA."

• In a typical 401(k), you have relatively few investment choices. Outside the 401(k), you have lots.
• There are usually fees glued onto a 401(k) plan – fees that are often hidden – fees that are passed on from your employer to you.
• By putting the 401(k) into an IRA, you will have one less account to manage. And that will make your life simpler: there will be fewer investment decisions to make, fewer passwords, fewer PINs, fewer beneficiary designations.
• This way, you're less likely to lose track of your old 401(k) accounts-which could happen if you've had a number of former employers.
• IRAs have more flexible withdrawal rules – for first-time homebuyers, if you are unemployed and need to buy health insurance, if you are paying for college expenses, etc.

On the other hand, Cupo continues, there are good reasons to consider keeping your 401(k) where it is. Namely:

• A 401(k) may offer a higher level of protection from creditors.
• If you're 55 or older when you leave your job, you're eligible to take penalty-free withdrawals from your former employer's 401(k) plan. If you roll the money over to an IRA, though, this option isn't available until you reach 59 1/2 – unless you take "substantially equal periodic payments."

Some other things Cupo suggests that you think about:

• You can transfer funds from your 401(k) plan to a Roth IRA, where any appreciation will escape future taxation. To do this, your adjusted gross income (AGI) in 2009 cannot exceed $100,000. But starting in 2010, there is no AGI limit. Rolling over money from a 401(k) to a Roth IRA may have immediate tax consequences, so consult your tax adviser first. Click here for more details.
• Do you have any former-employer stock inside your 401(k)? If so, check with a tax adviser to see if you should take advantage of a tax benefit called "net unrealized appreciation" – NUA.

Warren Boroson will answer readers' questions, or find experts who can answer them. Write to This e-mail address is being protected from spambots. You need JavaScript enabled to view it