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Posted on November 25, 2008

Retirement Investing Basics: Changing Jobs and Your 401(k)

If you’re moving to a new employer, you may be wondering how you can secure the retirement savings you’ve accumulated.

While specifics differ among companies, the most commonly offered retirement plan is the 401(k). In case you’re not aware of how it works, the 401(k) allows you to invest directly from your gross income without any tax deductions. Your money grows and compounds tax-deferred until you’re ready to retire. When you change jobs, it is important for you to understand your options.

Withdrawing the Money

Most departing employees need not even consider this option. If you make an early withdrawal, the amount you withdraw is subject to taxation as ordinary income and an additional penalty tax of 10% is levied. Unless you are in dire need, this is a very bad idea.

Rollover to an IRA

This will be the wisest course of action for most departing employees. The transfer of assets from a 401(k) to an IRA is called a “rollover,” and is the simplest of the options. An IRA is an Individual Retirement Account that continues to shelter your money from taxation. The rollover can be completed through direct transfer, or a trustee-to-trustee check. Consult your 401(k) plan administrator for details.

Leave the Money Where It Is

For employees who have yet to accumulate $5,000 in their 401(k)s, this is generally not even an option. If you have over $5,000 in your 401(k) account, your company will usually allow the money to remain in their plan. This means that at retirement, you can withdraw the money from the plan in the normal manner. If you are unsure of your next employer, or are receiving an excellent return on investment at your current company, this is the right choice. Otherwise, you will probably choose an IRA rollover.

When you leave an employer, the 401(k) plan administrator is required by law to give you detailed information regarding your 401(k) plan balance, and procedures for rollover and other options. Make sure you understand the ramifications for your 401(k) before you change jobs. If you are still unsure, consult an accountant or trusted financial advisor.

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