Most of us haven’t been working for the same employer our entire lives and, at some point, have probably left behind an inactive 401(k) or other retirement plan. At the time, it was probably easier to leave the account invested in the same funds, and start saving in a new plan with your new employer.
But what do you do with the old account (or accounts) that you have accumulated over the years? Do you leave the account where it is? Cash it out? Roll it over? You may be surprised to learn that you may not have a choice.
The IRS allows plans to have a “force-out” provision, which means that if you have a low balance (less than $1,000) the plan can close your account and force your money out. If your balance is between $1,000 and $5,000, then the IRS permits plans to force your account balance out and roll it into an IRA. (PERA does not force any accounts out, no matter how small the balance is.)
So what should you do? The first step is deciding whether to leave the account where it is (if you have that option) or to consolidate it with your current retirement plan via a rollover.
It might be tempting to take a distribution of your old account, but try not to do this. First of all, if you are under the age of 59 ½, you will be hit with the IRS early distribution penalty, which is an extra cost in addition to the taxes that you will already be paying on the distribution. This can amount to a significant loss of your account – if you are in the 25 percent tax bracket, you will be losing approximately 35 percent of the distribution to the IRS.
In addition to the up-front loss on taxes, you will be losing the future retirement earnings that you could have had if you had left your retirement account invested and allowed it to grow tax-free. For example, if you are age 35 and have an account with $10,000, it will grow to be worth over $32,000 by the time you are eligible for a penalty-free distribution at age 59 ½ (assuming 5 percent earnings per year with no additional contributions). Taking a distribution of your account is a significant loss of future retirement income.
Colorado PERA makes it very easy for you to roll your old retirement accounts into your PERAPlus 401(k) or 457 plan account. If you are currently working for a PERA employer, you can roll your old account into the PERAPlus 401(k) plan even if you are not currently participating in the plan. Simply complete this form and submit it to ING.
If you are a PERA retiree or inactive member, you can rollover your old accounts into the PERAPlus 401(k) even if you do not have a 401(k) account already established. Simply fill out the form linked above and submit it to ING. In order to roll funds into the PERAPlus 457 Plan, you must already have an account established with the plan.
You will likely find that it is a lot easier to manage your retirement account once all of your old accounts are consolidated into one. There is no need to manage your investment options in multiple accounts, and you will only have to review one account statement each quarter.
No matter which plan you choose, look at the investment options and the fees to ensure that you are getting the best value. For the benefits of PERA’s plans, take a look at this article: 10 Things You Might Not Know About Your PERAPlus 401(k)/457 Account.
This post was written by Kimberly Riccardi from Colorado PERA.
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