RETIREMENT PLANNING » IRA & ROTH ACCOUNTS

Regardless if you quit, were laid off or fired, there are several options of what to do with your 401k investments if you part ways with your employer.

Depending on the terms of the 401k disbursements from your company regarding vested distributions, you should be entitled to take the entire enchilada and you can choose to do so in a number of ways.

Option 1: Leaving your money as it is

Even when you leave, you can still choose to keep the money on deposit in through the original plan manager. Your company will no longer make matching contributions as you will no longer have a paycheck deductions to match. If you are experiencing financial hardship by leaving the money as is, creditors will not be able to touch it and you will not get saddled with any type of early withdrawal penalties. If you opt to get a new job, that money can be easily transferred into the new employer's 401k plan.

Option 2: Rollover to a traditional IRA

If you want to sever all connections with your former employer you can opt to roll over the 401k funds into a traditional IRA. This money will eventually be freed up, but this strategy will allow you both to avoid early withdrawal penalties and taxes and the investments will keep earning on a tax deferred basis.

Option 3: Rollover to a Roth IRA

Roth IRA's are another option for handling your 401k investments when you leave your company. Although you will have to pay taxes on this type of retirement fund instrument, the payment could be worth it if you expect to earn more in retirement then while working.

Option 4: Withdraw your money

Finally, if you lost your job unexpectedly and you are getting caught in a financial mess, you can always withdrawal your money and cash out the account. In the long term it is better to leave your retirement money as is, but if your short term is going to be harshly impacted it is better to pay the IRS apremature-distribution penalty (for those under 55) Additionally your old employer will withhold 20% of the pay out amount for federal tax purposes.

Whatever happens, do not forget your 401k. You worked hard for the money and deserve every last cent of it.

Most Americans plan for retirement by investing into a 401k plan.

But the investment is not like others, you will be heavily penalized if you try to withdraw the money earlier than retirement age. In some cases, your money cannot be accessed at all expect in extreme hardship cases such asmedical emergencies, educational expenses or payments necessary to prevent eviction or foreclosure and proof needs to be provided.

However, if you are fortunate enough to have a non-hardship withdrawal clause in the terms of your 401k agreement, you got a lucky break.

What is a non-hardship withdrawal?

Some 401k plans have the flexibility of non-hardship withdrawal meaningyou do not have to prove hardship to access your money. By law, annually employees are required to receive a copy of their 401k "Summary Plan Description" and that document will mention whether or not your 401k plan comes with a non-hardship withdrawal policy. To avoid taxes and penalties from the withdrawal of you 401k money you need toplan on rolling over the money into another retirement plan or IRA.

What restrictions does a non-hardship withdrawal have?

There are typically restrictions limiting the 401k non-hardship withdrawal including:

• Withdrawal amounts typically cannot be greater than your vested account balance.
• After making a withdrawal you may not be allowed to make plan contributions for up to twelve months
• There may be a limit on the amount you can contribute to your 401k in following years
• Caps may limit the quantity of or amount of withdrawals made

The bottom line

Even though there may be options for tapping into your 401k for non-hardship withdrawals, it may be a good option just to leave the money as is and keep your hands off.

Many 401k plans have been negatively impacted by the negative downturn of the stock market. The better strategy would be leaving your money where it is and riding out the financial storm.

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