What happens when you leave a company where you were earning money in a 401-K account? Is there a penalty if you want to cash it out (assuming you're not of retirement age)?

Thanks.



~JerseyGirl~

 

My suggestion is to talk to a financial advisor on this matter. As far as I know, you can "roll over" your 401(k) into another 401(k) account (either with a new employer, or into your own retirement savings account). However, I'm pretty sure there'll be some adminstrative fees involved. I'm not sure about penalties for rolling over, but there are most definitely penalties involved with cashing out. On top of that, you'll be taxed on that amount of $$ as income. . . which is most likely higher than your income when you fist earned a good chunk of that money. 401(k)'s are basically a way to defer taxes on your income. The gov't allows you to put that money away, pretax, now, but will tax you on it upon retirement (or whenever you take it out of the account). The idea is that you're making far less $$ in retirement than you are while employed, thus you are taxed at a lower rate on that money. . . I think. Defintiely find a professional and ask her.

 

Like above consult your own accountant to make sure us knuckleheads have some idea what is going on.

depending on the amount you have and how big/small your company is, you can often time leave it right where it is..... or, if you think you can do better, you can roll it over into your new employer's plan or your own IRA depending on what you choose. Normally there are not any fees involved with any of those. at my current job if you have $5k or more, you can leave it with my company forever.... or you can take it.....

You can also cash out... there is a 10% penalty right off the top, along with having to pay federal taxes on it for the year you took the distribution.

Unless you have some other wonderfull retirement plan you would be smarter to leave it in some kind of retirement......

but if you happened to have like 17 rental houses (like one guy on this board) you could just plan to pay those off and retire with the $ you make from those, so having a 401k or IRA is not all that important.

Goodluck.....

o ya.... also depending on how long you have worked there, you may or may not be 100% vested...which means you may not be eligible for the full amount in your account.... consult the HR dept.

 

Don't cash out! Your future employer should have a point of contact (at the institution they use) to help with the roll over. At least my company does.

Ask someone you trust for a financial advisor referral, and don't forget compounding works wonders! Good luck.

 

All good advice from the other posters. I'll just add that you have a very limited time window to roll the account into a new 401-k or other tax deferred retirement account.

 

with them. Unless you want to lose a good size portion to tax and penalities, don't cash out. Even if your new employer doesn't have a 401K program, you should be able to roll it over. Check out some big firms like Fidelity, AG Edwards, and maybe your own bank.

 

Each company sets up the 401(k) differently. The basics are the same though.
Scot summed it up best.
There is always a penalty for early withdrawal and this is not recommended. I think the only exceptions are medical hardship or taking a loan against your plan to make a down payment on a home (for first-time home buyer's only).

 

As someone else said, if you have more than $5,000 fully vested, you can just leave the money there if you like.

I have three different 401k plans running at the moment, two of them from prior jobs. I didn't roll them into my new plan because the investment options are better in the old plans. Also, if I ever want to cash them in (in case of emergency), I can just cash them in and pay the penalties/taxes. I don't think you can cash in a 401k plan if you're still an employee of the company providing it, you can only borrow against it. I like to be able to get at my money if I need it.

 

terms vary by employer. I cannot cash mine as long as I work for the company, but my old company did allow it.

I would look into rolling it into a IRA (traditional, not roth). It's super-simple really. Just about any IRA sponsors will do most of the work for you (they want your money).

If you cash out, the money is taxable AND subject to a 10% IRS penalty. That's not the way to go. If you roll it over you pay no tax and no penalty as traditional IRAs are tax deferred. Now, if you want to do a Roth IRA, you would pay the tax on the withdrawal, but future returns are subject to way less tax...that may be to your benefit especially if you're in your 20's. The only way to avoid the 10% penalty is if you are making a down payment on a first home or are under a defined hardship.

Talk to an advisor.