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Now that I told everyone about my plans to quit my job and move onto full time blogging, it’s time to look into how I should handle my current 401k account once I leave the company. As I don’t have a huge 401k account balance, the penalty if I don’t do anything will be small but this doesn’t mean that I don’t spend time on this. Managing our finances successfully means making sure that we take care of all the little things so let’s explore what I can do with my 401k.

Options, Options, Options

Roll the Money into a New 401k
If you are changing jobs, you can always roll the money into the 401k plan at the new job. This is generally a good approach if your new employer has good fund selection. In my situation however, I am going out on my own so this is not really an option for me.

Get Cash Now
I can elect to have my plan administrator write me a check for my entire 401k amount. In fact, this is the most popular option in the United States. Unfortunately, this is also the worst possible option. If I choose to cash out my 401k balance, not only will 20% of the entire account be deducted for tax purposes, 10% more is due as a penalty come tax time next April!

Leave My 401k Plan at My Current Employer
There’s always the option of leaving my 401k plan at my current employer. This is not a very good way of handling my 401k because I can never add funds to the 401k plan. Add to the fact that my current 401k plan doesn’t have great investment options, I’m not considering this option.

Turn it into an IRA
The most natural approach seems to be rolling over my funds into a IRA account. If I do this, I would ask my plan administrator to transfer the funds to my new IRA plan and I would never have to handle the money.

This way, there is no taxes or penalties. If I choose the home of my new plan correctly, I should also gain access to a much wider selection of investments.

If the plan administrator end up mailing me the check, I still don’t need to worry as long as the check is payable to the new plan and not to me. Once I receive the check, I can just bring it to my contact for the new plan and he/she will get the funds deposited into my account.

One Caution
If I forget to talk to the plan administrator about my 401k plan and a check for the account balance minus 20% upfront penalty is mailed to me, there is still a way to not get penalized! The government allows a 60 day window from the time I receive the check to find a new home for my 401k balance. I just need to make sure that instead of depositing the amount of the check, I come up with the 20% penalty with my own money and add that to the new plan. As long as the ending balance of my 401k plan and the opening balance of the new plan is the same, the government will give me a tax credit for the 20% they withheld when the check was mailed to me!

What I Think I Will Do With My 401k

Since I cannot change my 401k plan directly into a Roth IRA account, I will probably turn my 401k plan into an traditional IRA, then try to turn it into a Roth IRA at a later date. If you want to know about Roth IRAs, stay tuned as I will give you an update when I start planning that switch over.