Now that I plan to quit my job and pursue my own business, 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 relatively small but this doesn’t mean I should neglect this. After all, 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 a good fund selection. This will also make managing your assets a little easier because you will potentially have fewer accounts. In my situation however, I am going out on my own so this is not really an option.
Get Cash Now
I can elect to have the 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. I also lose all the tax deferral benefits of the amount that I already have in the account, so cashing out is actually a terrible idea.
Leave My 401k Plan at My Current Employer
There’s always the option of leaving the 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 account. My current 401k plan doesn’t have great investment options either, so I’m not considering this option.
Turn it into an IRA
So, that leaves us to the final option of 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 are no taxes due and no penalties incurred. If I choose a decent place to set up the IRA, I should also gain access to a much wider selection of investments.
Normally, this won’t happen but even if the plan administrator mails me the check, I still don’t need to worry as long as the check is made out to the new plan and not to me. Once I receive the check, I can just have the contact for the new plan get the funds deposited into my account.
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 be careful not to deposit the check to my own account but instead 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 move money from my 401k into an traditional IRA. I will then do a Roth IRA conversion at a later date.
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- E*TRADE IRA - Official Site