What to do with Your 401k After Leaving a Job

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 doing irreversible harm to your ultimate retirement strategy. The damage will occur in losses of tax-deferred earning potential as well as an IRS premature-distribution penalty (for those under 55) and a 20% withholding of your distributions from your old employer for 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 into an IRA unless otherwise indicated.

Rollover Your Funds

Ultimately, it does not matter if you 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 current IRA 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.