(Editor's note: This is the fourth in a series of columns on retirement by Jim Cramer, founder of TheStreet, and Wally Konrad, former senior editor for Smart Money magazine. To read the first installment, click here. The second article is here, and the third is here)
NEW YORK (
) -- If you're leaving a job, or worse, suddenly laid off, the last thing on your mind is your retirement account. You mean to get around to rolling your money over into an IRA, but the world has turned upside down and you're faced with more urgent priorities such as beginning a painful job search or grabbing the best retirement options.
No wonder 32% of workers leave their retirement savings in their former employers' 401(k) plans. Employers love it when you do nothing. The more assets a plan has, including money from former employees and retirees, the easier it is for sponsors to negotiate with plan providers for better terms and lower fees.
But that's no reason to let them keep your money hostage.
Here are just a few reasons why you should take charge and roll that money over today:
"With your 401(k) your investments are limited to whatever the plan offers," says Judith Ward, a certified financial planner with T. Rowe Price. "With an IRA you can have an account anywhere and you've got whatever investment choices you want."
More choices means you can more effectively diversify your retirement savings and offset the choices in your current employer's plan by using individual stocks or investments in asset classes such as real estate, commodities or energy that aren't always available in company retirement plans.
Plus, you'll be able to invest in high-growth stocks such as
, two holdings in my
Action Alert PLUS portfolio
that promise better returns than the plain vanilla mutual funds most 401(k)s offer.
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With an IRA you may withdraw money whenever you want to. If it is before you reach age 59 1/2 you may have to pay taxes and/or penalties but you can still get to your money. Employer retirement plans are trickier, says Ward. Often the only way to get cash is to take a loan against your 401(k) or prove you qualify for a hardship withdrawal, she explains.
What's more, you're also subject to whatever rules your employer may impose on your 401(k) plan, including how you may take your withdrawals during retirement. With some plans, these rules can get complicated and may affect your income stream.
So, have we convinced you yet? If so, you have another decision to make Should you rollover to a traditional IRA or a Roth? Unlike a traditional IRA, contributions to a Roth are not tax deductible. However, you'll pay no income tax on withdrawals during retirement. With both types of IRAs your earnings continue to grow tax free.
If you roll over into a Roth IRA, you'll be liable for taxes on your 401(k) contributions. Rolling over your entire account is unrealistic for most people because of the huge tax bill. Better, says Ward, to first put the money in a traditional IRA then gradually move a portion of it into a Roth.
That way, with part of your money in a traditional IRA or 401(k), and part in a Roth, you hedge your tax bets. If your income tax rate goes down in retirement, a traditional IRA works in your favor. If rates are higher than you expected, the Roth will help ease the burden.
The One Exception
There is one scenario where it may make sense to temporarily keep your savings with your former employer: if you retire or are laid off between ages 55 and 59 1/2 and you believe you will need your retirement savings soon. That's because you are allowed to take penalty-free withdrawals from a 401(k) (although you will still pay income taxes). With an IRA, you must wait until age 59 1/2 to withdraw funds penalty free.
Dealing With the Paperwork
If logistics are keeping you from transferring your 401(k), keep this in mind. Nothing bad will happen as long as you never actually touch the money yourself.
Instead you want to make sure your plan administrator transfers the money directly into a new or existing IRA. To do this trustee-to trustee transfer you'll have to fill out forms from your employer's plan and from your IRA custodian.
If the plan writes a check in your name, it is required to withhold 20% of the amount for the IRS. You have 60 days to put that money into another qualified retirement account such as an IRA. But you are also obligated to deposit the 20% that was withheld out of your own funds. Plus, you'll likely have a headache on your hands when April 15 rolls around.
At the time of publication, Cramer's Action Alerts PLUS portfolio held shares of MCD and DIS.