What to do with your 401(k) if you lose your job | The Frugalista

What to do with your 401(k) if you lose your job

by frugalista on March 16, 2009

Good morning!  I found this great article on what to do with your 401(k) if you are laid off. The author of that article is a fan of putting your 401(k) retirement savings into another retirement savings plan, the IRA.

I also talked to the Charles Schwab brokerage firm to find out what people who have lost their jobs should do with their 401(k) retirement funds. With social security being shaky, Americans must make sure they are financially healthy after retirement.  I know job loss can be devastating, but if you make smart money decisions now, I think you will weather the storm.

Here are some scenarios of what you can do with your 401(K) when laid off and the consequences from Charles Schwab:

*         First, you can make a direct transfer of 401(k) funds to what is known as a
Rollover IRA (you can call the human resources department at your
previous employer, but brokerage firms have "rollover consultants" who can request and handle all the paperwork
for you).  Best option: your entire account balance will transfer

*         You can also opt to get a check from your former employer,
which gives you  60 days to roll it over to an IRA. In general this is
not a good idea because your employer will be forced to withhold 20
percent for prepayment of federal income taxes.   You can retrieve that
20 percent if you move the money into an IRA within 60 days, but this is
an extra paperwork step.  Also, if you miss the 60 days and you are
under 59 1/2, you will be tagged with a 10 percent penalty (state income
taxes and penalties may also apply).

*         A third choice is to leave your money with your former
employer.   You won't have to pay taxes or penalties , but it also means
that you won't be able to continue contributing like you would if you
rolled the money into an IRA.   Also, the IRA will give you more
investment choices.    This option makes the most sense for people who
know they will be back in the workforce soon and plan to roll their old
401(k) into their new employer's plan.  But if the future is uncertain,
it's best to roll it over into an IRA and take advantage of the advice
that the brokerage firm can offer you on your investments.

What NOT to do:
Schwab strongly recommends against simply cashing out. You'll owe taxes on
the entire amount, plus potential penalties. And you'll be raiding your
retirement  nest egg, which means you'll have to contribute extra once
you're back in the workforce.

 I also found this article, "How to Rollover 401(k) funds into an IRA. Check it out!

If you were laid off, what would you do with your retirement savings? What did you think of the Charles Schwab advice?

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