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.