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What to Do with Your 401k After a Layoff

What to Do with Your 401k After a Layoff

Nancy Opiela | Monster Contributing Writer

If you’re among the millions of people who have lost their jobs since the recession started in December 2007, you’re facing some daunting financial questions. One may be: What should I do with my 401k?

While raiding your 401k to pad your bank account during your time of transition may seem appealing, doing so could sabotage your chances of a financially secure retirement. Generally, if you tap your 401k account before age 59½, you’re subject both to ordinary income taxes and a 10 percent early withdrawal penalty.

However, if you lose your job and are 55 or older, most plans allow you to access your funds without an early withdrawal penalty, but you’ll still owe taxes and forfeit what could be decades more of tax-deferred growth.

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How much could you be making?

Check with your 401k plan administrator to determine how to keep your retirement nest egg intact. Generally, you have three choices, each with pros and cons: You can leave your 401k plan with your former employer, roll over your account into an individual retirement account (IRA) or transfer your old 401k into a new company’s plan.

Option 1: Leave Your 401k Where It Is

Leaving your assets in your old company’s plan may be convenient, but it limits your investment choices. What’s more, if your account has more than $1,000 but less than $5,000, your ex-employer can transfer your assets into a Safe Harbor IRA with an investment company of their choosing. (If your account balance is less than $1,000, your employer can close your account and send you a check for the balance, withholding 20 percent for taxes.) Some plans also limit the number of transactions, assess extra service fees or restrict beneficiary options for terminated employees.

However, leaving your money in your 401k plan affords you superior creditor protection. Federal law prohibits creditors from attaching 401k accounts, a protection not afforded by most states to IRAs.

Next: Roll Over Your 401k >>

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