Rollover 401(K) Account to An IRA Account After Leaving Your Job

With the rise in unemployment over the last couple of years, we’ve seen thousands of workers saying goodbye to their employers and hitting the streets.  While it may not be the top thing on their mind if they’ve been laid off, many of these folks have 401(k)s or 403(b)s with their old work that they’ll now need to figure out what to do with.

In most cases, when you leave your job your old employer wants you to do something with your retirement plan (some will still let you keep it there but that option is becoming less and less prevalent).  It’s been estimated that as many as half of all Americans who’ve left a job recently have cashed out their 401(k) accounts.  Considering the taxes and penalties involved, that option should be an absolutely last resort.  That leaves really only one option – take that retirement plan account with you.

The best choice you can make for you retirement plan account is to roll it over to an IRA.  This allows the account to maintain its tax deferred status and allows you to continue building up your retirement nest egg without any interruption.

It’s so easy to look at that account balance when you’re leaving your company (especially if it’s a small balance) and figure that it’s less hassle and paperwork to just take it in cash instead of keeping it in a retirement account.  When you think about it further, you have to consider the downside.  As we’ve mentioned already, anything you withdraw from your 401(k) before you’re eligible will be taxed at your ordinary tax rate which could be anywhere between 10% and 35%.  Added on to that is the 10% early withdrawal penalty the IRS will levy.  And if you decide to withdraw your balance, you won’t even get the whole thing.  Your employer is required to withhold 20% of the balance as a sort of “prepayment” of those taxes for the IRS.  Not sounding like a great deal any more, huh?

Completing a rollover of your account is the wiser choice.  It takes a little effort to get all the paperwork completed and it can take up to a month or two to get the entire transaction completed but it’s worth it in the end to keep your money in a tax-deferred account and growing.  Just about any bank, brokerage or mutual fund company will be happy to accept your retirement account.  Better yet, they’ll do most of the work for you.  Just contact the company you want to move your money to and tell them you want to rollover your 401(k) to them.  They’ll send out all the appropriate paperwork to you.  Simply fill it out and return it to them and they’ll do the heavy lifting of contacting your employer to get the transfer completed.  What could be easier?

Despite rough patches and unexpected unemployment, you should try to do everything in your power to keep your retirement funds right where they are.  That’s not to say that you shouldn’t withdraw the money if you’re struggling to pay your normal bills.  A withdrawal for a reason like that would be completely understandable.  But it should be a final option.

Keep it in an IRA and you could find yourself still on track for a comfortable retirement despite the bumps in the road along the way.


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Author Info

This post was written by David Dierking. David lives outside Milwaukee, Wisconsin and has been working in the financial services industry for over 13 years with a background in investments, accounting, and marketing. He earned his Chartered Financial Analyst designation from the CFA Institute in 2004 and was recently published in the Milwaukee Business Journal. You can also check him out at The Ultimate Fit Challenge

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