What to Do with 401K

Updated on March 21, 2009
M.M. asks from Santa Barbara, CA
15 answers

When I left my job over two years ago to stay home with the kids and have our baby, I didn't cash out or rollover my 401K. Of course now that the ecomony and stock market are really crashing I have lost a chunk of my savings. A family member advised me to just leave it where it's at and it will build itself back up as the market begins to recover, is this true or is it be better to roll it over into something safer? I just don't know what is the "best" thing to do, so maybe a little knowledge from you mamas can help, Thanks!

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L.S.

answers from Los Angeles on

Hi M.,

Give my husband Derrick a call at ###-###-#### to set an appointment with him. He is a wealth coach and he can help you make the right decision. His service is free of charge.

L. Stroud

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S.H.

answers from Honolulu on

Ditto.

Now, DO NOT CASH-OUT your 401K.... otherwise, you will be paying a tax penalty on it because it will be considered (1) a early withdrawl (2) as "income". Whenever you simply "Cash-out" a retirement account... you will pay a tax on it right at that point... then at then end of the year, you will be paying more taxes on it.

The solution is: to have your bank or financial advisor transfer/roll-over that 401K money DIRECTLY to another retirement account vehicle. The minute you cash-out or transfer any retirement money to yourself or to a non-retirement account vehicle...you will get taxed on it.

If you do not have a Financial Advisor, then you need one. Or, go to your bank that you have dealt with before. But, you need financial advise.

The market is very volatile now... so you have to stomach that. Sure, when the market recovers, it will build itself back up. But, no one knows when that will be or when the economy will recover... since it has been in a downward spiral for the past 5+ years.

My Hubby...had a "pension" plan/savings sitting around at a previous employers company. We asked our Financial Advisor what to do... if he can just cash it out to get the money for ourselves... or put it into another "retirement" account type vehicle. Our Advisor said: "NO NO NO... you do NOT cash out this money or you will be taxed on it (at least 10%), THEN you will also be taxed on it at the end of the year because it is considered "income" AND it is an early "withdrawl" on a retirement account...thus that will be another 10-20% that that money will be taxed on. THUS, you will LOSE at least an additional 20+% of that hard-earned retirement money." It's not smart.

The best thing to do is, do a transfer of that retirement money DIRECTLY into another retirement account... because the second it is withdrawn or cashed, you will pay penalties on it and taxes. Any Financial Advisor or financial institution can do this... for you.

Once your 401K monies are rolled-over into another retirement type account, (ie: ROTH, IRA) then you can decide what investments to put it into, either conservative investments, bonds, CD's, mutual funds, stocks, etc.

All the best,
Susan

1 mom found this helpful
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D.M.

answers from Los Angeles on

Agree with both previous posts!

When I moved out of my old job, I moved my money! Keep it in something simple you can navigate. I would go to your bank and ask them for suggestions...I got to a Credit Union and they helped me find something that I could manage on my own without a hundred phone calls to their help line.

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K.P.

answers from Los Angeles on

You need to move it out from your former employer. Most employers have rules about how long you can leave it with them. You need to have total control over your money! Call HR and find out what the steps are to roll it over. It is possible you can roll it over to an IRA within the same company so you don't have to actually sell the fund that are owned in the account.

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J.S.

answers from Los Angeles on

Don't cash out your 401(k) because this is considered a 'taxable' event. Go to your old employer and ask for 'roll over' forms. I also agree with SH in that obtaining a financial planner is highly advisable. To prevent this 'taxable' event, you might have to roll over your money into another 401(k) plan or into a traditional IRA. If you do roll it into an IRA, you can choose a 'self-directed' IRA in which you aren't investing in stocks and bonds, but in direct investments (e.g. promissary notes, real estate, private equity, oil and gas, technology, etc.). You get to control where your money goes. I rolled over my 401(k) plan into a self-directed IRA and decided to invest in a promissary note and part ownership of an apartment complex in Illinois. Currently, my money hasn't decreased! It hasn't grown that much, but at least I haven't lost anything!
If you'd like to know more about self-directed IRA's or are in need of a financial advisor, I can refer you. Just e-mail me directly.
Good luck!

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K.R.

answers from Los Angeles on

I am an HR administrator. Definately move it so you know what is going on and where your money is invested. Your old employer is in charge of all that and you need to be in charge, after all it is your money. Go to you bank and talk with a representative. You have many options and do not have to invest your money in the stock market if you choose not to. YOu can also roll it over into an IRA which is not affected by the stock market until you feel safer about investing your money. If you do roll over to an IRA or CD this can be done with out penalties or taxes incurred as well, just like if you were to roll over into other investments. Whatever you do the 1st step is to go to your bank and speak with them. The 2nd step is to get your money from your old employer so you are in charge of it. You can still invest it because the market will get better but at least you will be making the decisions. If you need further assistance, I will be glad to help.
K.

1 mom found this helpful
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D.H.

answers from Los Angeles on

Hi M., My name is Deb H. and I work as a financial advisor. My office is is in Manhattan Beach, off the 405 and Rosecrans. If that's close to you, or you just want some simple advice call me. ###-###-####.
Sometimes the option of leaving the funds in the 401k is not possible and also you can't contibute to it anymore, and dealing with the changes in funds can be a hassle, no one wants to work with you...IRA's are a good choice, but the funds you choose should be customized to your risk and time frame and goals. This is what I do all day
and would be glad to email or talk on the phone to see if
it is a good fit for you.
good luck. D.

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J.P.

answers from Los Angeles on

Or invest some of it in "poor people". By that, I mean, don't invest in high tech, etc. Invest in Walmart, etc....since they made TONS of money this last quarter, when everyone else lost.

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S.S.

answers from Los Angeles on

That is accurate. You should leave it in place. If you can put a little more in there in fact, it would be the best time to buy mutual funds.

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D.S.

answers from Los Angeles on

All the advise I've ever received is the 401k is a long term investment vehicle. I've seen mine rise and fall once before and when it came back, it came back much stronger than it was before it fell. I'm leaving mine in.

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S.G.

answers from Los Angeles on

I've been told by many people that you should leave it in there and it will turn around, unless you're close to retirement then they suggest to get it out.

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M.P.

answers from Los Angeles on

I would leave it in place. In order to cash it out to put it in a CD/MMA, you would have to pay a 40% tax on early withdrawal. If you are concerned about your 401k, check which funds you are currently investing in. You can reallocate the money to more 'traditionally' safer funds (lower risk = lower reward) such as T-bonds, etc. It also depends on your comfort with risk and your current age as relates to retirement age. Your 401k Management company should list the investments in order of conservative to aggressive risk and start to move your money toward the conservative side if you are concerned. If you move dollars now from one fund to another, there is a loss involved (as those shares are probably worth less than when you bought them)however you will be buying shares of the other funds at the lower rates as well. Try to check some sites forums on fool.com to see if they can elaborate more. Good luck!

L.S.

answers from Los Angeles on

We're all in your shoes, M.! My IRA and 401Ks have lost HALF of their value. From everything I have read and heard, including my father, who teaches finance, leave it alone. As long as you are invested in good stocks/mutual funds to begine with (highly rated by Morningstar), they will come back eventually. You still have the same amount of shares, it's just that their value is low right now due to the recession. The value will come back, to be sure. We've just got to ride this one out. Especially since we have 20 or so years to go before we'll need this money. I know it's tough to watch it dwindle away, but think of it over the long haul. Good luck. (oh, and to clarify, I wouldn't leave it w/ your former employer's plan. Roll it over into an IRA and then you can control it. But don't cash it out, reinvest it.)

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A.A.

answers from Los Angeles on

M.,

Last Sept I switched 100% of my 401K into a money market stable account (not stocks) and I have not lost a dime. In fact, I have gained at the rate of 3% per year. It's not much but it's alot better than losing anything. When the market starts to turn around I will put it back into stocks but for now I know my money is safe.

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J.A.

answers from Los Angeles on

I had a similar situation and I rolled mine over into something where I could purchase a reider where my interest would not go below 6%. I paid a small fee, but that was taken right from my rollover. So whatever you do look into that. If you need the name of someone let me know and I can give you his information. Good luck!

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