The following was originally posted August 5,2008, but I come across this topic again and again.
I have to tell you about this conversation I had the other day regarding 401(k)s. But I'm going to switch it around a bit--you know to protect the innocent.
So a, ehem, friend was talking with her husband about her 401(k) that's been sitting in her former employers account for over a year. She was vested in the account and contributed the maximum, so it's not a small amount. For reasons that aren't significant to this story she left her job with no intention of getting another. Anyway her partner had an idea that she should move her 401(k) funds into his. This is where I come into the conversation. "Can we do that?"
I think I know the answer to this question, but I'm not an certified expert. And so I called on an expert. Here's what Nelisha Wilson from LPL Financial had to say about merging 401(k)s:
No. You cannot roll your 401k into your husband's for a couple reasons.
1) 401ks are company sponsored plans. You have to work for the company in order to have assets in the plan.
2) 401k money is individually owned. The money can NEVER be co-mingled with your husband's. As long as you live the money must remain separate.
Your options are to keep it in the 401k, roll it to an IRA (Individual Retirement Account), or cash it out. It is not advisable to cash out due to the heavy tax load you will pay. If you are under the age of 59 1/2 the amount you withdraw is subject to your income tax bracket and a 10% penalty per federal regulations. Rolling your money to an IRA is a non-taxable transfer and allows you to take control of the money and invest it how you wish. For the best advice, I would recommend consulting a financial professional at the Coors Credit Union for a free consultation.
One statistic that always surprises me is that more than 50% of people cash out their 401(k) when they leave a job. I understand that at that moment when you are between jobs or switching jobs is usually when you need some cash. Probably most of this group have low balance 401(k)s. But with tax penalties and lost compound interest doing so is a big step backwards.