Posts Tagged ‘401k’

What Can I Do With My 401(k) If I’ve Been Laid Off?

It’s a complex World isn’t it? They say the recession is global now and that means you are not alone when laid off. So don’t take it personal but do take a key decision on your 401 (k). Basically you have 3 options.

1) Do nothing and leave your 401(k) funds in your ex-employers plan.
2) Take the money and run.
3) Roll your contributions over into another qualified individual retirement account (IRA).

If your employer gives you the necessary information to properly choose your options, then good! If he doesn’t however, be sure to call the fund administrator and get the facts.

A really important thing to know is whether you are fully ‘vested’. The money you paid out of your monthly salary is always yours, but your employers’ contributions will depend on your tenure. If you’ve been at this workplace for years rather than months then you’re most likely 100% vested.
Lots of people take option 1 and leave their 401(k) with their ex employer fund because it is the easy thing to do. However it is probably not the wisest course of action. Your former employer will no longer want the trouble and costs of administering your account. You may be billed for it. You will no longer be entitled to the support of the fund administrators. You will not be able to take out loans against your 401(k) either. Finally there is always the danger that you may lose track of your account, especially if you move a long distance away.
There is a big penalty to pay if you take the cash from your 401(k) account. Your employer will automatically take 20% for the IRS before sending you your check. Failure on your part to place your funds into another qualifying IRA within 2 months of withdrawing will also make you liable for tax and a 10% early withdrawal penalty. Only people older than 59 years and 6 months are exempt from this.
So in truth option 3, rolling over to a new IRA, is the best option. You will be required to make up the 20% deduction but you can get this back through your next tax return. If you are fortunate enough to find another job more or less immediately you can do a direct rollover from your old 401(k) to the new one. Simply notify your old employer of the address and they will forward a check without fuss, taxes or withholding charge.
If you are not so fortunate and have to find an IRA you will have to take an ‘indirect’ rollover. The check made out t o you for 80% of your entitlement. I.e. minus 20% withheld by the employer and now with the IRS. You can reclaim this amount but you are still subject to the 10% early withdrawal penalty and taxes.

Roth vs 401k

A Roth IRA is an Individual Retirement Account (IRA) allowed under the tax law of the United States. Named for its chief legislative sponsor, Senator William Roth of Delaware, a Roth IRA differs in several significant ways from other IRAs.

Overview

Established in 1996 (Public Law 105-34), a Roth IRA can invest in securities, usually common stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible). As with all IRAs, there are specific eligibility and filing status requirements mandated by the Internal Revenue Service. A Roth IRA’s main advantage is its tax structure. Depending on with whom a Roth IRA is set up, it can be managed in creative ways, including investments in non-typical assets (self-directed IRA).

The total contributions allowed per year to all IRAs are limited as seen below (this total may be split up between any number of traditional and Roth IRAs. In the case of a married couple, each spouse may contribute the amount listed):

*Starting in 2009, contribution limits will increase in $500 increments based on inflation.

The 401(k) plan is a type of employer-sponsored defined contribution retirement plan under section 401(k) of the Internal Revenue Code (26 U.S.C. § 401(k)) in the United States, and some other countries.

A 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly, or “deferred,” into his or her 401(k) account. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Many companies’ 401(k) plans also offer the option to purchase the company’s tax deferred. Before the January 1, 2006, effective date of the designated Roth account provisions, all 401(k) contributions were on a pre-tax basis (i.e., no income tax is withheld on the income in the year it is contributed), and the contributions and growth on them are not taxed until the money is withdrawn. With the enactment of the Roth provisions, participants in 401(k) plans that have the proper amendments can allocate some or all of their contributions to a separate designated Roth account, commonly known as a Roth 401(k). Qualified distributions from a designated Roth account are tax free, while contributions to them are on an after-tax basis (i.e., income tax is paid or withheld on the income in the year contributed). In addition to Roth and pre-tax contributions, some participants may have after-tax contributions in their 401(k) accounts. The after-tax contributions are treated as after-tax basis and may be withdrawn without tax. The growth on after-tax amounts not in a designated Roth account are taxed as ordinary income.

The above information and more can be found here and here.