Many Americans now invest because 401(k)s and other plans offered by their employers make it easy to do so. That's good news, because it's becoming clear that in the future, fewer retirees will have big pensions and more will have to rely on their own savings.
Stats show, though, that the average American will change jobs at least 10 times during his or her lifetime. This could make it harder to keep up with a retirement account, since many people choose to "cash out" their savings when they leave their jobs.
In fact, a global human resources services company called Hewitt Associates found in 2003 that when people change jobs, 42% of them cash out their retirement savings. The number is higher for younger people and people with smaller balances. Half of people aged 20 to 29 take cash out, and 72 percent of people with a balance between $5,000 and $10,000 do the same.
When you switch jobs, a smarter way to handle your retirement fund is to roll it over. By putting your money in a Rollover IRA, you can avoid paying taxes now and let your money grow without having to pay taxes on it. You also won't have to pay a penalty for taking money out early if you don't do it before you turn 59 1/2.
T. Rowe Price has one of the easiest and most flexible Rollover IRAs out of all the financial companies that offer them. The T. Rowe Price Rollover Planner, a free, interactive CD-ROM, helps investors decide what to do with their existing 401(k)s when they change jobs or retire.
The "T. Rowe Price Rollover Planner" has a distribution calculator that lets investors compare the huge differences between taking cash distributions when changing jobs and keeping the money invested in tax-deferred accounts.
For example, a 35-year-old with $25,000 in a 401(k) who wants to cash it out would only have $15,750 after taxes and an early withdrawal penalty of 10%. If the money was instead put into an IRA, it would be worth about $252,000 before taxes by the time the person is 65, assuming an average annual rate of return of 8%.
