Unfortunately I will be losing my job on Sept 14th. I will be 7 months pregnant at that time and my severance pay will hopefully carry us through on bills until the end of the year. However, my company has a 401k plan that I have never contributed to but they apparently have been putting money in it for me for the six years I have been here. I am 100% vested and the acct has about $2900.00 in it. What should I do with it?
It doesn't seem to be enough money to roll over into anything and I have no accounts anywhere to roll it over into. If I cash it in do they automatically take out the 10% penalty and 20% for taxes or just the penalty? Even if I got $2,000.00 of it, it would go a long way to help us out financially until I recover from a third c-section, enough to look for another job. Any suggestions? Thanks.
Cindy from Lorain, Ohio
Hi, my husband and I have cashed out 401K's more than once, recently to pay off our second mortgage. You will definitely have the 30% withheld, in addition to any state taxes (not sure that applies in Ohio). Another negative to doing this is that money would be a start to retirement savings which is harder and harder to get as you get older. Also, if the money would push you into a higher tax bracket, that is another thing to consider.
Most financial advisers would recommend that you roll the money into an IRA or other mutual fund. The company that is currently handling the money could advise you about that. But I understand the lure of windfall money, especially when you you are looking at a new baby and unemployment.
I would recommend using the money to pay off credit card debt so that you actually reduce the amount that you are paying out every month. That way, the interest you save will balance with the penalty.
Good luck and congratulations on the baby! Jess (07/18/2007)
I would recommend rolling the funds into an IRA. When I was in your situation I rolled my retirement account into an IRA at Vanguard. In the long run, it will be your best investment. Even if you don't add any more funds, the interest will compound over time. (07/19/2007)
I think it is very good advice to roll over into a traditional IRA at first, however, I think it should be put into a Roth IRA over the next few years. You don't have to put the whole amount in one right away, you can convert it in small amounts each year so when you do convert it into a Roth, you don't have much tax to pay because you're distributing the tax over a few years. What is good about a Roth IRA is that it will build interest upon interest and when you draw it out in retirement you won't have to pay any tax on it. Check with your tax person. They would tell you how much each year would be good to convert. (07/23/2007)
Roll it over to IRA at your bank. It's found money, if not contributed to plan. Someday you will be glad, as it will earn more interest as years go by; and when you are financially able, add to it yearly what you are allowed to. Best wishes. (07/23/2007)
Roll it into an IRA. If you cash it between the penalty and taxes you would be lucky to get 2/3's of it. You will be amazed at how it grows. It could be a nice start for that new baby. Congrats. (07/23/2007)
I would talk to a financial advisor. Maybe an Edward Jones rep, or some reputable company in your town. If you roll it over in an IRA, probably a Mutual fund. It sure would be nice to collect on when you retire. If you can get 8% interest, it will double in 8 years and grow and grow. (07/23/2007)
The best bet is to put it in an IRA. By the time you get everything taken out of it you won't have much left of it, so the IRA is the best bet there. (07/23/2007)
Like the others have said, the best thing you can do with the money is roll it over. Think of it this way: most people grossly under-save for retirement and end up having to push retirement back for many years or scale back their retirement lifestyle dramatically. Also, you will almost certainly never get around to putting that $3000 back into retirement savings - so once you withdraw it, it will be gone forever.
I think Jess's idea of using the money to pay off debt and reduce your monthly expenses is a very good one. I also have one more alternative to suggest: most plans will allow you to leave your money in the plan when you leave your job. So how about doing nothing for a while until you've found a new job and you're financially stable again? Then you can roll the money over to an IRA or your new employer's 401(k) but still have the safety net of knowing it's there if you need it without being tempted to spend it frivolously.
Congratulations on the baby and good luck with your decision! Cathy (07/23/2007)
Call Fidelity, Vanguard or T.Rowe Price Mutual Funds. (Any no-load mutual fund group.) DO NOT cash it in! Roll it over and put it in a global mutual fund. This means it is invested in U.S. and international companies. Leave it alone and it will grow just as your baby will. This is for your retirement. You have the blessing of time for your money to grow. Invest any money you can tax-deferred. This is the beginning of wealth. Save first, tax-deferred. You will be happy you did in years to come. (07/24/2007)
DON'T CASH IT IN. Realistically, you weren't planning on having that money anyway. Definitely roll it over to an IRA. You have to make sure they don't cut you a check personally. By taking the payment, it could get knocked down by about 40%, whereas even if you left it in an IRA you never contribute to again, that $2,000 can grow into a nice little sum over time with the beauty of compound interest.
Still feeling like you need the money now? I can guarantee if you look at your expenditures, you can save that money within a year with little changes. Not sure how cool this is to recommend, but there's another e-budget newsletter I like - check out www.dollarstretcher.com - that often covers finance related (owner was/is fin. consultant). Can also search archives. (07/24/2007)
I didn't have much in my 401k when I stopped working to stay at home with the kids and we cashed it in. The penalties weren't bad, because they were based on what we earned and since I quit in Feb. our gross for that year was very small. (07/24/2007)
Roll it over into a traditional or Roth IRA. It doesn't matter if you don't "already have an account to roll it into." You can create a new account. Vanguard.com has low cost IRA's. I'm sure there is probably a phone number on their website. You need to call someone, like Vanguard, and ask how to do a "direct rollover." This means the money goes directly from your 401(k) to the IRA so you don't pay taxes or penalties.
If you haven't saved anything for retirement besides this, you really need to start. (07/24/2007)
I'm only 28 and I started contributing to my previous employer's 401k plan when I was 24, so thinking about retirement is still weird for me. I was thinking about rolling my funds over to my new employer's plan but I've since decided to open a Traditional IRA-CD with my credit union. The rate is right around 5.05% APY. That's not bad if you ask me. It beats the big banks that's for sure. (10/09/2007)
Roll it into an annuity which is a qualified plan so you won't lose money or incur fees by rolling it over. Most of these plans have guarantees so you will not lose your principal amount and guaranteed minimum gain. IRA's work just like a 401k, so you can still lose money in the current market with the economy the way it is, which is not recommended.(11/13/2008)
When I lost my job, I was terrified. A friend sent me to: www.splitsecondquote.com, where they looked at all the options and helped me with an annuity product that gave me a guaranteed rate of return with no chance of losing any money and the belief that the system still works. In addition, they even replaced my life insurance, which I lost, at a lesser cost than what I was paying before. Thanks for your website! (07/23/2009)
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