One of the biggest mistakes young workers make is cashing out their retirement account when they leave a job. They not only have to pay taxes on the money, along with a 10 percent penalty, but they also lose all the future earnings that could provide retirement income.
Nonetheless, more than 80 percent of young workers take their money and run, mainly because they have small balances in their 401(k) retirement accounts and don't take the time to study their options. According to Greg McBride, a senior financial analyst at Bankrate.com, there are two main problems: "They don't see it as a lot of money, and they don't think long-term."
A new federal regulation will make it easier for workers to preserve small accounts, and some retirement plans are developing new procedures to help, too. Under the current regulations, a departing worker with a 401(k) balance of $5,000 or more can leave the money in his or her former employer's 401(k) account, transfer it to an Individual Retirement Account, or move it to a new employer's 401(k) account. An employee with a balance under $5,000 can open an IRA or roll the money into a new employer's 401(k) program. If an employee doesn’t give his or her former employer instructions about what to do with the money, the employer can simply send the former employee a check, and that's what the majority do.
All this will change under a U.S. Department of Labor regulation announced Sept. 28, 2004, and effective March 28, 2005. Under the new rule, if a departing employee has accumulated between $1,000 and $5,000 and gives no instructions about rolling it over, the employer can keep the money in its plan until the former employee is 65 or put the money into a special rollover IRA maintained in the former employee's name.
Submitted by Phillip A. Belin, Berens & Tate, P.C., Omaha, Neb. You can contact Mr. Belin at berens@berenstate.com. © 2004 Berens & Tate, P.C. Reprinted with permission.
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