Question: What are the 401k withdrawal rules I should consider after just leaving the company I was working for?
Answer: Traditionally, many financial experts advise former employees to leave their funds in their employer’s 401k plan and simply begin another 401k account with the new employer, if one is offered.
This continues to be good advice as long as you remain comfortable with the integrity of the current plan and the fund managers. The other option is to rollover the funds into an Individual Retirement Account (IRA) of your own choosing.
"Money was never a big motivation for me,
except as a way to keep score.
The real excitement is playing the game.”
- Donald Trump |
Whatever you do, DO NOT withdraw the funds from the 401k. Taxes and fees can devastate your balance if you withdraw early.
When you leave a job, you need to carefully consider what your next move will be. Typically, you’ll have at least 30-90 days to make any important decisions around your 401k. Again, in many cases you can leave your account right where it is, if you feel secure about the company and if your plan allows it.
If you do decide to leave the plan to reside with your former company, you should understand that you won’t be able to personally contribute to it anymore and your former employer certainly won’t be adding to the account on your behalf - so the balance won’t be growing like it once did. (You will continue to earn interest based on your investment choices within the plan so the balance will continue to grow over time.)
There is a way to obey the 401k withdrawal rules without having to leave your money with your previous employer. 401k rules allow you to do a “rollover”. A 401k rollover simply means that you “roll” your funds directly into another retirement account, whether that is a brokerage IRA or a mutual fund IRA.
The rollover process is fairly straightforward. Your former employer or the 401k provider can supply the form that you’ll need to roll your funds into another retirement account. Your new company’s investment rep or the investment agent can provide the necessary 401k advice and will even handle the move for you.
Most importantly, the foremost of all 401k withdrawal rules applies, even if you leave your job – DO NOT cash out your 401k.
The loss that your account will suffer is far too great if you withdraw the funds. In the same year you withdraw money you will have to pay all the taxes that have been deferred while the money was in the 401k account.
The tax burden can run up to around 30% of the amount you take out. Add this to the severe early withdrawal penalties (usually about 10%) and you stand to lose in the neighborhood of 40% of your hard-earned retirement savings if you cash out the account.
Protect your money. A loss of this magnitude can set your retirement back by a number of years!
While the drawbacks of cashing out the 401k account appear to be obvious, too often employees make this critical error simply because they don’t think the situation through and do not know what else to do.
Educate yourself on the 401k withdrawal rules established in your old plan before deciding what path to take. Never make financial decisions without having first done your homework. You’ll likely see that a quick and easy rollover is your best bet.
For additional advice on retirement-related issues, we recommend reading our free guide, Money Matters, which is a tool that provides great advice on financial security.
"Everyone who got where he is
had to begin where he was.”
- Robert Louis Stevenson |
|
Debt is NOT your friend. It's not a wonderful "tool" for building wealth. That's a myth.
