Roll Over Your 401k
If you have an employer sponsored 401k and you happen to leave your current job, you’ll
probably have some decisions to make about how to handle that money going forward.
In most cases if you have $1,000 or less in your 401k, you will probably get that money
in the mail within a month or two after you stop working for the company. But if you
have over $1,000, but less than $5,000 in your account, you can choose whether to cash
out your account or roll it over. If you have more than $5,000 you can roll over that
amount, or simply leave it where it is.
What’s the right option for you?
Keep in mind that any distributions you take from your 401K are considered taxable by
the IRS and in addition, you’ll likely pay a hefty penalty for early withdrawal. If your
account is large enough, you could just leave it where it is but then you’d have no way of
reallocating your investments if the market took a turn.
Your best option is to roll your 401K over into an individual IRA. This allows you to
avoid the taxes and early withdrawal penalties, and it’s fairly easy to accomplish.
Of course, you should talk with a financial advisor before opening an IRA, especially if
you are unfamiliar with how these accounts work, and investment in general. Rolling
over to a Roth IRA for example, will generate additional taxes as funds held in a Roth are
not pre-tax dollars as is the case with a 401K and traditional IRA. Under the new
guidelines, you can spread this tax bill over a three year period, but it’s better to be fully
informed up front than have some financial surprises when it’s too late to change your
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