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More Ideas on What to Do with "Old" 401(k) Money…

As noted in my last post, “How Old 401(k) Funds Can Get You Out of Debt Quicker,” many people change employment and still have money sitting in an “old” 401(k) they set up with their previous employer.  In my last post, I noted that this money can be used to pay off high-interest-rate debt, such as credit cards.

Here are some additional options to think about in terms of how to use this money instead of leaving it behind where is doing very little to benefit you today:

Option 1:  Roll this 401(k) money over into an IRA that you control.  Put it where you might get a good rate of return and have little or no risk.  Make sure you keep control of this account and can take the money out as needed.  Of course there will be a 10 percent penalty to pay if you do withdraw from an IRA before age 59.5, but that does not apply to the 72(t) tax rule. This ruling allows you to retire this plan (meaning you no longer contribute to it and only take the earnings from it over your life expectancy, usually age 84) without incurring a penalty. 

So, for example, if are say age 44 and have $100,000 in an account you retire, you will receive $3,365 per year without any penalty. CAUTION:  Once you select this option, you cannot change it  until age 59.5.  This example is simplified, so check with your tax adviser on how this best fits your circumstances.  There are places to put the $3,365 each year that can make you around 4 percent interest per year. Contact me for more details:  peter@moneymastery.com. So for this example, this means that when you reach age 59.5, all the money you started the account is still there, as you only took the earnings when you took the 72(t) option.

Option 2:  Roll the 401(k) money over into your own IRA that you control, then convert some portion of this amount once a year to a Roth IRA.  After five years, the principal amount you placed into the Roth IRA can be taken out without a penalty.  Check with your tax adviser first before taking this option to make sure you know all the rules associated with it, but in general this is another great way to get money out of an old 401(k) without paying a 10 percent penalty.

Option 3:  Roll the 401(k) money over into your own “self-directed” IRA.  There are extra fees you pay to the trustee of these kind of plans, but they allow you flexibility on where to invest and manage your money.

These ideas are for the purpose of giving your alternatives to leaving your money in an old 401(k) or IRA.  By being creative you can double the amount of money you might otherwise have if you just leave it where it is. For more information on these options feel free to email me: peter@moneymastery.com.

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