When you leave a job, it only seems natural to cut all your ties to your former employer as quickly as possible. For many people, that means taking money out of their old employer-sponsored retirement plan account. Simply taking the money and spending it leads to immediate taxation for all, plus a 10 percent penalty for many younger workers, so it's smarter to move your money to your new employer's plan or to an individual retirement account. Yet in several cases, the smarter choice is simply to leave your money where it is. Let's look at three situations in which making no moves at all is the best answer.
1. When You Have a Great Low-Cost Plan
Most people can't wait to roll over their old 401(k) or other employer-sponsored retirement plan because it opens up new investment opportunities. If your ex-employer's plan was bad, then you can easily cut costs with the wider range of stocks, funds and other investments you have access to in an IRA. Moreover, if your new employer's plan has lower costs, it makes sense to switch.
Yet in some cases, your ex-employer's plan is the best option available. For instance, the federal government's Thrift Savings Plan offers some of the lowest investment fees in the business, yet it offers the same sort of exposure you'll get from higher-cost funds that will erode your overall returns. Similarly, even some private-employer plans give you access to institutional share classes of mutual funds that can greatly reduce your costs compared to what's available to most individual investors. As a result, before you give up your ex-employer's plan benefits, make sure you know whether you can do better elsewhere.
2. If You're Between Ages 55 and 59½
When you roll over a 401(k) into an IRA, you become subject to the rules that govern IRAs. Specifically, if you withdraw money from an IRA before you reach age 59½, then you have to pay a 10 percent penalty on the withdrawal.
Yet what many people don't realize is that for 401(k)s, you can make withdrawals between age 55 and 59 ½ without paying any penalties, as long as you lost or quit your job after turning 55. If you roll over that 401(k) to an IRA, though, you lose that right -- so be careful before you make that irrevocable decision.
3. If You Own Stock in Your Employer
Owning shares of your employer's stock can be a dangerous move for workers, as it essentially links two key parts of their economic stability to the health of their employer. If something happens to the company you work for, then not only will the value of the shares you own in your retirement account fall, but you'll also face the possibility of losing your job or facing cutbacks.
But when it comes time to consider rolling over your old 401(k), company stock gets special treatment. Unlike most assets, if you take a withdrawal of your company stock, then you'll only have to pay taxes and penalties on the amount you initially paid for the stock, rather than its current value at the time you take the distribution. More important, you don't immediately have to pay taxes on the increase in the stock's value since you bought it. As long as you keep holding the shares in a regular taxable account, your gains will be deferred from tax. When you do sell, moreover, you'll get the favorable long-term capital gains rate on any profit. By contrast, if you leave the stock inside the 401(k) or roll it over to an IRA, you won't owe any tax immediately, but the gains will eventually get taxed at your ordinary rate. Under some circumstances, it therefore makes sense to bite the bullet now to get bigger tax savings later.
Don't Be Hasty
When you leave a job, you might think it's automatically best to cut every single tie you have to it. But when it comes to your retirement account, think twice before you give up on what might be the best retirement-savings alternative you have.
3 Reasons to Stick With Your Ex-Employer's Retirement Plan
The Earth has 370,000 miles of coastline with some amazing spots to walk along the beach, listen to the waves crash and relax -- or even party. In the U.S., you can choose among hundreds of Atlantic coast towns: the quiet of Cape Cod; the wide expanses and soft white sand along the Jersey shore, the dunes in North Carolina, or the high energy of Miami Beach. On the West coast, there are the hipster cool California beaches of Newport and Venice Beach, and the serenity of Oregon's Cannon Beach, which holds a sand-castle contest every June. And if the thousands of beaches on the continent aren't enough, you can hop over and take surfing lesson on Waikiki Beach in Hawaii or go windsurfing in Maui.
Providenciales in the Turks and Caicos won the 2014 Travelers' Choice award from TripAdvisor.com for its diving and snorkeling along the miles of accessible coral reefs. Other popular Caribbean destinations include the U.S. Virgin Islands, Barbados and the Cayman Islands. These are all year-round destinations, although many experts say the spring is the best time.
Is there anything more romantic than a relaxing week, watching the sun set from your private hut in the French Polynesian island of Bora Bora? Been there? Done that? How about the honeymoon hotspots of Tahiti or Fiji or the 115 islands of the Seychelles in the Indian Ocean? Check out Australia's Dunk Island rainforest, or get to the Maldives while you still can. Some climate experts warn that it could be the first nation to disappear due to climate change.
There are far more than seven natural wonders in our world, but that list is not a bad place to start. You can see the Grand Canyon, the Great Barrier Reef off the coast of Australia and Mount Everest. There's also the dramatic natural scenery along the Swiss Alps as well as 59 U.S. national parks, including the classic (Yosemite, Yellowstone), the most-visited (Great Smoky Mountains), the wet (the Everglades) to the dry (Death Valley, where the temperature once hit 134 degrees).
If you want everything taken care of for you, a cruise might be your ticket. It's a floating home with tons of food (of varying quality), entertainment and multiple destinations. It also may give you the most bang for the buck, with budget packages available as well as upscale voyages. You can cruise through the Caribbean, up to Alaska (in-season, of course), through the Mediterranean, through the fjords of Norway or down the rivers of Europe. A cruise can also offer something for you, your children and the grandkids, too. The biggest cruise companies are Carnival (CCL) (which also includes Princess and Holland American), Royal Caribbean (RCL), and Star Cruises (based in Malaysia).
After endless meetings, computer time and paperwork, this is the time to get moving. The Grand Canyon is not only grand to look at but it offers some high-adrenaline hiking and white water rafting. Yosemite, Yellowstone and other national parks also offer top-notch hiking trails. Overseas, you can take a four-day, 30-mile trek along the Inca trail to Machu Picchu in Peru; explore the rugged beauty and wildlife of Australia's Outback, or cycle through the rolling hills and villages of France's Provence and Bordeaux regions. While these are active vacations, you don't have to all of the work yourself. Tour companies will make the (sometimes-luxurious) arrangements, and you don't have to rough it.
This might be the ultimate getaway: book a seat on Richard Branson's Virgin Galactic flight into space. The first one is set to launch in the spring of 2015 from the company's Spaceport in New Mexico. Obviously, it's not for everyone. The cost for a seat is more than $400,000. If you want to keep your feet firmly planted on earth, revisit Darwin's trip to the Galapagos Islands or interact with the penguins in the Falkland Islands. Or learn the local culture by trekking through Thailand or Costa Rica.
You can take a safari through more than 100 countries in every continent, but safaris are most associated with Africa. The best times are usually January through March and June through December. A trip into the wild is a chance to get in harmony with nature, experience local cultures and traditions and maybe capture it with one-of-a-kind photos.
I'm not sure which is better: a Michelin-rated restaurant in Paris or a sidewalk cafe with fresh baguettes and pastries. (I do know which is more affordable.) Europe is full of foodie destinations, such as Rome or a tapas crawl in Barcelona. In Asia, you'll want to sample the wonderfully fresh sushi in Tokyo and food in Huangzhou or dozens of other Chinese cities.
In the U.S., go coast-to-coast with lobster rolls in Maine, the famous restaurants and food trucks in New York, Chicago's burgers and pizza, Creole specialties in New Orleans and the coffee bars and fresh oysters in San Francisco. There are many local favorites. Travel+Leisure magazine names the pizza in Providence, Rhode Island (check out the movie "Mystic Pizza" for the Connecticut version); the cheesesteaks of Philadelphia; the small cafes in Savannah, Georgia; the Tex-Mex chili sauces in San Antonio; and the barbecue in Kansas City. When you've consumed everything there is to eat in the U.S., go north of the border to Montreal and Quebec for French cuisine.
Just because you're old enough to retire doesn't mean you too old to learn. In fact, this may be the best stage of life to expand your mind. Road Scholar is a nonprofit that offers 5,500 educational tours in all 50 states and 150 countries. Popular programs include Christmas in New York City and photography of the four corners region of Colorado, Utah, New Mexico and Arizona. In volunteer vacation, participants maintain trails in the U.S. Virgin Islands, work with orphaned or abandoned children in Peru or do other meaningful things with your time, brain and energy.
It's more than a Fleetwood Mac hit of the 1970s. The opportunities to travel are endless. You can go by yourself, as a couple, in small groups. You can go for a long weekend to Boston or settle in for a two-month stay at a villa in the hills of Italy. You can go on a limited budget (AARP offers travel discounts) or live in the lap of luxury. You'll meet new people. You can start to cross items off of your bucket list -- and add new ones to it.