Leaving your job? Leave no 401(k) balance behind

Some of us work to better our community, others work to build or create something of value, and others choose to work for a sense of accomplishment. Almost all of us work in order to make money, save that money, and one day retire on the income we'd saved for just that purpose.

Central to this is the expectation that you are saving into a worksponsored retirement plan, and if you are, you can pat yourself on the back because you've just completed the most difficult aspect of saving toward retirement. Everything else you do with that money is a cake walk, if you know just a little bit about the world of "rollovers." Let's get you informed with a few rollover tips.

Left and leaving

So you've left your job ... or maybe it's left you. Regardless of who did the "leaving," one thing you can be certain of is that your old 401 (k) balance is not going to manage itself. If your 401(k) balance is a nominal amount, a few things could happen to the money you've left at your old job even without your acquiescence.

If your balance is under $1,000, your employer has the option of simply mailing you a check to close out your account. This can result in a number of penalties and taxes for you that could have been avoidable if you'd simply rolled your balance out upon termination.

If your balance is under $5,000, your employer has the option of creating a Traditional IRA (for those assets in the traditional 401(k)) and rolling your money into it on your behalf. Here the taxes/penalties will not apply, but at this point, you will have ultimately lost control of your investment. Yes, the money is still yours, but it is anyone's guess whether the money will be invested exactly as it was in the 401(k), simply plopped into a money market fund or invested along some other strategy.

Take the money and run

It is often tempting, in your earlier working years, to consider cashing out your balance to sustain you and your family while you search for another job. However, if you are under 5914, you might do your future self a favor and consider getting money by some other means.

591/2 is the age at which you can begin taking distributions from retirement accounts without incurring the 10 percent federal penalty. Even at age 5914, many individuals who plan on continuing to work may choose a "rollover" option so as to avoid taking the money, using it and ultimately paying income taxes on distributions during your working years.

I have seen some families take early distributions from traditional 401(k) accounts and spend nearly half of the distribution on taxes and penalties.

The income you've earned and received the year in which you take the distribution dictates the federal income tax bracket that applies to your traditional 401(k) distribution. If you have worked for the whole year and you think you may earn less next year, you may want to wait until early the following year to take a distribution. Let's do the math on this:

Assume you find yourself in the highest federal income tax bracket (39.5 percent), you are 40 years old and you take a distribution of $100,000 from your traditional 401(k). Once the federal penalty for early distributions is applied (10 percent), you may only receive $50,500 after taxes and penalties. Ouch.

Roll with it

The benefits of rolling a 401(k) from a previous employer's plan can be significant. Frankly, when someone leaves a job, it is that person's sole responsibility to ensure that the account continues to get rebalanced, that it continues to benefit from a keen eye to risk and suitability, and that it is invested with your timeline in mind. No one but you, ora trusted advisor, will be able to do this for you.

Leaving a 401(k) balance at every company you've worked for can mean that you might find yourself buried under a multitude of plans by the day you retire. Do you want to try to manage five, eight or even 10 retirement plans, or would you prefer to simplify your life and manage a small few?

Traditional 401(k) balances can often be rolled into a new traditional 401(k) at your next employer. Many folks choose to benefit from often broader investment options and strategies by rolling the balance to a traditional (or rollover) IRA outside of a company-sponsored plan.

And don't forget about Roth 401 (k) balances, as they can be rolled to Roth IRAs outside of the plan, thus preserving their post-tax status.