401k is an employer-sponsored retirement plan that lets employees contribute, save and invest some portion of their paycheck for their retirement. The plan benefits both the employee and the employer get a tax deduction when the amount is deposited to a 401k account directly. Hence it is common for you to have common doubts regarding your 401k.
Yes you can take the cash, but you may be hit with a 10% IRS penalty if you are under age 59? and pay ordinary federal and state income tax on the value of the distribution. So if there is $20,000 in the 401(k) plan and you take an early distribution, you could end up with only $11,000 (assuming 10% early withdrawal penalty and 35% combined state and federal income taxes). That is quite a hefty cost to access this money that has been earmarked for your retirement, not to mention how difficult it can be to re-start your retirement savings plan.
Oftentimes you can leave the 401(k) money in your old employer's plan, especially if your account is over $5,000. Some employers will force ex-employees to move the smaller accounts out.
It depends. Most 401(k) plans have limited investment options (5-20 different mutual funds or employer stock) and the quality of the investment options (fees, performance, diversification, etc.) vary with each plan. Many people decide that they can find more appropriate investments outside of their 401(k).
Oftentimes you can do this, but then you would be subject to the limited investment options of your new employer's 401(k) program. If you like the investment choices in the new 401(k) program, this is a good idea. Otherwise you may want to consider a Rollover IRA.
If you want more control over how to invest the former 401(k) balance, you can open up an IRA (Individual Retirement Account) at nearly any investment company. You pick the investment company that offers you the type of investments that are best for you. Your old employer will send you a check for the balance of the 401(k) program, but the check will not be made payable to you. It will be made payable to the investment company that you choose.
As long as this rollover is executed as a 'trustee-to-trustee transfer? you will not have to pay any taxes. The only fees you would pay would be whatever fees (if any) that your old and/or new investment company may charge you.
There are a variety of ways to do research for finding investment companies. Some people like to do their own research online, while others ask the advice of family and friends. In today's world, where retirement savings is so important, many people are seeking the advice of a retirement specialist.
A retirement specialist will be able to help you determine the most appropriate mix of investments for your retirement planning and continually monitor the progress of both the investments you have made and your progress toward reaching your retirement goals.
Some retirement specialists charge a flat or hourly fee. Others receive a commission directly from the investment company that you choose so you don't have to pay anything out of pocket. A quality retirement specialist should be very straightforward about how he/she gets paid and should be happy to explain this when you ask.
You need to find someone that you are comfortable with and that you can trust. There are 3 main things you may want to look for:
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