odorous savanna: Savvy Money: When you get a new job, don't forget to do something ...

By Christina Harrison and Judy Howell
KyForward columnists
?

You?ve just started a new job and are immersing yourself in your newly assigned responsibilities. Then you get it in the mail ? a 401(k) statement from your previous employer. ?What should I do with this?? you wonder. If the answer is to file it and forget it, you might want to think again.
?

Your options for an ?old? 401(k) are fairly limited. You can leave it where it is, roll it into an IRA, or move it to your new employer?s plan (if the new plan allows it). Let?s look at those options a little more closely.
?

1. Leave it where it is. Most plans will allow you to leave the funds there, with one glaring exception, explained below.
?

If your old plan will allow you to leave it there, why would you want to do so? The two things to be evaluated: total costs and investment options. Does the old plan offer a good range of investment options ? preferably institutional shares of great mutual funds? Does it offer a stable value fund which yields more than traditional money market funds? Are there other administrative costs associated with this plan?
?

If the old plan meets those criteria, then you will want to leave your money in the old 401(k) as is. Also, 401(k) plans typically offer better protection from legal threats than IRAs.
?

Now, what is the exception? If your balance is below $5,000, the old plan has the right to remove your money from the plan. Small account balances tend to cost the 401(k) plan more, so employers have the option to force you to move your money.
?

The plan will notify you at that time, so you have the opportunity to either roll it into a new IRA or into your current employer?s 401(k) plan. They will send you paperwork that allows you to process a direct rollover.
?

If you do not respond, the old 401(k) plan can either roll your money into an IRA that will probably have a default investment. If they send the money out to you, they will send 20 percent to Uncle Sam first. And you will pay income tax and penalties on that distribution.
?

There is a way around that if you find yourself in that position ? you can take the check you receive and roll it over to an IRA . If you can, add your own money to the deposit to make your rollover amount equal to the distribution amount. That way the whole distribution is tax-deferred, and you will receive credit on the tax withholding when you file your Federal income tax. You MUST complete the rollover within 60 days of the distribution.
?

If your old 401(k) balance is less than $1,000, your old employer may simply cash you out, withhold 20 percent and send you a check. You can still follow the instructions above to roll it into an IRA, making up the tax withholding with your own dollars. Again, that means the distribution, as long as done within 60 days, will not be taxable to you.
?

2. Roll the complete balance into an IRA. When you terminate employment, you should receive paperwork containing instructions on how to roll your plan amount into an IRA of your choice. Once you get the paperwork done (it can be a little overwhelming, because the old 401(k) sends you so much paperwork, but it?s really not hard), the old 401(k) plan sends the funds directly to your new IRA. Voila! It is done without any income tax implications and no extra work on your part.
?

The best news in rolling the IRA over to a self-directed IRA is that you have more investment options. If you want to roll the funds over to a particular fund family, then you are limited by its offerings. You have the option to transfer the old funds to a brokerage IRA which would allow you a much wider range of mutual fund options and the opportunity to purchase individual bonds (as opposed to a bond fund which may lose value as interest rates rise).
?

3. Roll the complete balance into your new employer?s plan. You will first need to confirm that the new 401(k) allows rollovers. Once you have confirmed that the new plan will accept your old funds and have evaluated the new plan (see No. 1), you can roll the funds over to your new plan. The nice thing about this option is it does cut down on the number of statements you will receive and allows you to see your combined retirement assets in one place.
?

The bottom line to all of the above is: Be sure to do SOMETHING with your old 401(K) funds.
?

If you have $1,000 in an old 401(k) and let the plan send you a check less taxes, you will receive somewhere around $550 (depending on your tax bracket). If you are able to invest it and earn 5 percent a year for 30 years, it will become $4,321. In 30 years, you probably won?t remember where you spent the $550, but you will be glad to have $4,300.
?

Christina Harrison and Judy Howell, H2 Investments, are affiliated with First Kentucky Securities Corporation (member FINRA, SIPC). They have over 25 years of experience assisting individuals in meeting their investment and retirement goals.