RETIREMENT PLANNING » IRA & ROTH ACCOUNTS

After years of working for your company, you are off to pursue new opportunities in the form of your own business. The time working for the company was not bad as you made friends, contacts, gained valuable experience and amassed a tidy sum in your 401k plan. As you are preparing for your exit interview, one of the most important things for you to consider is what you're going to do with your 401k portfolio.

Avoid Cashing Out

One thing you should try to avoid doing is cashing out your 401k plan. By withdrawing and spending that money, you will be doingirreversible harm to your ultimate retirement strategy. The damage will occur in losses of tax-deferred earning potential as well as anIRS premature-distribution penalty (for those under 55) and a 20% withholding of your distributions from your old employerfor federal tax purposes.

If you do not take the time to transfer your 401k to either a new job or roll it over into an IRA, the decision may be made for you.In 2005 a law was passed that employees with between$1,000 and $5,000 in their 401k would automatically have their investments moved intoan IRA unless otherwise indicated.

Rollover Your Funds

Ultimately, it does not matter ifyou quit, were laid-off or fired. You need to take the time to address your 401k issue before losing all contact with your company. Some prefer severing all ties with their previous employer. One such step is by moving the money from your company's 401k manager to your own.You should take the time to locate a new financial adviser as well as speak to the currentIRA custodian to get the proper paperwork required to take any necessary steps (such as rolling over into a traditional IRA or even a Roth IRA). By being proactive with your money, you can ensure that all the 401k funds leave with you.

It is no secret that the current state of the economy is a bit off-kilter from its recent past. Almost every sector is experiencing economic downturns. Depending on how your 401k assets are allocated, you may be noticing a personal decrease of your own. Those who are fortunate enough to get the benefit of a 401k plan from their employer may want to consider choosing a 401k asset reallocation strategy during the difficult economy.

What is Asset Allocation?

401k asset allocation refers to how an investor chooses to distribute investments among various types of investment options available through a 401k manager. In general, your portfolio should be made up of a variety of investment opportunities to avoid the old adage of putting "all your eggs in one basket." Your 401k is probably made up of mutual funds composed of stocks and bonds.

Diversifying for Safety

Any healthy 401k portfolio will include investments in mutual funds, which themselves invest in both bonds and stocks. Already, there are some diversification mutual funds that are composed of an assortment of investment vehicles. Although the stock market is the highest risk type, over time the highest gains are reported in this sector of the investment industry. Since the risk is so high, it is important to also have some money invested in the safer bonds and money market accounts.

If you are interested in reallocating your 401k assets during this difficult economy, your first step would to be to speak with your portfolio manager and get some professional advice. You want to ensure that you're making the right adjustments so that you don't suffer even greater losses because you shifted too quickly prior to a market correction.

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