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You have to make a decision about what to do with the money you’ve accumulated in your 401k or 403b retirement plan when you leave your job—whether you’re laid off, find a better job with a different company, or quit to go back to school or start a business. Many people don’t know they have choices. Here are some options on what you can do with old retirement investment accounts:

Roll your 401k into a self-directed individual retirement account (IRA). This choice is usually the best move because you’ll have more control over your investments. Like a 401k, a self-directed IRA is a tax-deferred account unless your roll it to a Roth IRA and pay the taxes. However, most IRA providers offer an unlimited number of investment choices, rather than the small list of funds an employer provides. So if your situation changes, you’ll be able to choose any investment that’s best suited for your needs. In addition, if you want help from a financial adviser, you can choose any adviser rather than being restricted to services offered by the 401(k) plan. If you still have a few retirement plan accounts at former employers, those can be consolidated into one self-directed IRA. Any qualified retirement plan assets can be moved into the same IRA without a tax hit when you leave your job in the future. In the end, transferring your 401k into an IRA makes the most financial sense.

You could leave the money behind in the prior employers plan. You can keep your 401k with your former employer without getting hit with taxes or penalties, however most 401k plans limit the number of funds you can choose from, so leaving your money behind perpetuates the problem of having limited investment choices. Also remember when you leave your job, you might not be eligible for any financial advisory services offered by the company. This means that your 401k assets will probably not be managed, so as time goes on, you may not own the right mix of investments as your goals and needs change.

If you are getting another job, you could roll your 401k into your new employer’s retirement plan. You’ll probably encounter the same problems as the previous choice, because your new employer’s 401k plan is also likely to offer a limited number of investment choices. Also, once you roll over your money into the new 401k, you can’t undo it. Your money has to stay with your new employer’s retirement plan until you leave the company. But at least you preserve the tax-free status of your retirement money.

A bad idea (but I am putting all on the table) is to take your 401k money in cash. If you cash out your 401k plan, you’ll have to pay taxes. If you’re under age 59 1/2, you’ll also have to pay a 10 percent early withdrawal penalty. As a result, you would lose close to half of your 401k money to the penalty and taxes. In addition, your retirement money will not be compounding any more. For these reasons, cashing out is a terrible idea. Despite the costs, a majority of people take the cash. According to a 2010 study by Hewitt Associates, 46 percent of employees took a cash distribution from their 401k plan when they left a company. I understand the allure of cashing a check for thousands of dollars, but it has a terrible impact on your retirement savings.

Instead, you need to take the money, no matter how small amount, and start a self directed IRA where you can invest in assets you understand like real estate, notes, gold, business, etc.


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