Investing and considering your 401k options may confuse you, but fortunately, withdrawing cash or transferring your 401k money from a former employer is not difficult. Research your options and consider opening an Individual Retirement Account (IRA) or transferring funds to your current 401k.
Talk to your financial advisor and research your options before you decide what to do with your 401k amount. According to a 2002 Hewitt Associates survey, people in their 20s or less than $5,000 in their $401k are most likely to cash in. Withdrawals bring you money quickly, but you will lose 20% of them on income tax and 10% on early withdrawal fees.
Cameron Huddleston, a contributing editor for Kiplinger.com, recommends transferring your money into your new employer’s IRA or 401k plan. These two options allow you to avoid taxes and fines and have a financially healthier pension fund. Having all your money in one place also makes it easier for you to manage, in addition, you no longer have to trade with your former owner.
Ask your current employer if they accept money transfers from old 401k plans. Unfortunately, not all companies do so. If your current employer allows money transfers, decide if their investment options are appropriate. In general, you want a 401k package that has many stocks, bonds, and currency market options and does not require you to buy a large amount of the company’s stock.
Study personal retirement account (IRA) options and talk to a financial advisor. The IRA does not have the same investment restrictions as the employer’s 401k plan. You can open an IRA through a bank, brokerage company, or mutual fund company. If you choose to transfer your funds to an IRA, you must first set up an account. Setting up an IRA is free, but some require a minimum investment of $1,000. Once the account has been set up, ask your former employer to transfer the money to your new IRA.
If you initially withdrew your 401k cash, you can still include it in the IRA. If you do this within 60 days of receiving the check, you will receive a 20 percent credit at the time of tax calculation.
Countless financial advisers, including Cameron Huddleston of Kiplinger.com, advise not to withdraw 401k of your cash. Not only do you have to pay a fine, but you also jeopardy your retirement.