Avoiding Messy 401(k) Mistakes

Staten Island commercial bank sees little reason for funds to be orphaned


STATEN ISLAND, N.Y. – Workers who move from one job to another are leaving behind an estimated 15 million accounts for want of knowing what to do about them.


Victory State Bank, Staten Island's only community-based business bank, contends that these valuable retirement accounts need closer attention by the workers they're intended to benefit.

To a great extent, the problem for most is a knowledge gap that the account holders need to rectify in their own self-interest.

The large financial-services organization Fidelity among other things is a provider of 401(k) retirement plan services and has compiled some pointers for workers who have set aside money in such a plan.

First, a reminder of what a 401(k) plan is. It is established by employers for eligible employees to make salary contributions from part of their pay. The idea is to build a nest egg for retirement.

The “401(k)” label refers to subsection (k) of the Internal Revenue Code's Section 401, which is about pension plans, profit-sharing and more specifically, deferred provisions.

Contributions to a 401(k) plan are tax-deferred. This means the money is excluded from taxable income during the tax year when the contribution is made. Income taxes aren't paid until the worker retires and begins to take distributions from the plan.

There could be any number of career moves and job changes during the pre-retirement years, and these can be opportunities for inattention to what a plan is doing or even its very existence.

So now Fidelity has entered the discussion with some pointers on what to do with an existing 401(k).

Those "orphan" accounts mentioned earlier get left behind by former employees, mainly because of inertia or confusion over strict rules for moving the money, Fidelity observes.

And because the IRS doesn't allow procrastinating on a key decision – a window of just 60 days lets money be reallocated into a different tax-advantaged account if so much as even a dime is withdrawn – it has compiled a rundown of ways to avoid what could be a costly mistake.

Whatever decision an account holder makes, the firm says to “remember the clock may be ticking for you to contact your old 401(k) administrator.”


Option 1: Cash out


Unless you're in dire financial straits and really, really need the bucks for living expenses, the general consensus is this is a bad idea, Fidelity says.

Aside from ceding potential gains in your portfolio, as notes Sarah Walsh, vice president of retirement solutions, in a statement from Fidelity Investments, "you will have just given the IRS a huge chunk of the money you've been saving for years. That's money you won't have for retirement."

How so? Twenty percent is withheld to pay federal income taxes – the state will want a cut, too – with another 10 percent "early-withdrawal penalty" slamming those under age 59 1/2.

Or, to use an example from Fidelity's website at fidelity.com, say you're a 36-year-old who raids her $50,000 account. After federal taxes and penalties, you'd be left with only $32,500.




Double congrats if your boss will be matching all or part of your new 401(k) contributions.

That could be a good sign, Fidelity says, but know that not all firms accept rollovers. If yours does, your big question is this: Are the plan's investment picks to your liking?




As with the previous option, you get to avoid the tax bite of cashing out. Fidelity notes that the difference here, though – and these could be major pluses – is that not only do IRAs offer more investment choices than the typical 401(k), but you're also able to make penalty-free withdrawals for qualified education expenses or up to $10,000 for a first-time home purchase.

"The rollover process is relatively easy," Fidelity again quotes Walsh. "And if you already have other accounts elsewhere, it may be simpler and more effective to consolidate under one roof."




Penalty-free withdrawals are allowed for those who leave their jobs at age 55 or older – as opposed to 59 1/2 for IRAs – and unique investment options might warrant just letting things ride, Fidelity points out. But some people forget the account exists and further contributions are verboten.


About Victory State Bank

VSB Bancorp, Inc. (OTCQX: VSBN) is the one-bank holding company for Victory State Bank. As Staten Island, N.Y.’s only community-based commercial bank, Victory State Bank operates five full-service locations on the Island: The main office is in the community of Great Kills, and branches are in the communities of West Brighton, St. George, Dongan Hills and Rosebank. For additional information, Victory State Bank may be reached at 718-979-1100 or visited online at www.VictoryStateBank.com.


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