Investing and considering your 401k options can be confusing, but fortunately, cashing out or rolling over your 401k money from a former employer is not difficult. Research your options and consider opening an Individual Retirement Account (IRA) or roll your money over into your current 401k.
Speak to a financial adviser and research your options before you decide what to do with your 401k money. According to a 2002 Hewitt Associates survey, those who are in their twenties or have less than $5,000 in their 401k are most likely to cash out. Cashing out gives you quick money, but you will lose 20 percent of it to income taxes and 10 percent to early withdrawal fees.
Cameron Huddleston, a contributing editor for Kiplinger.com, advises that you roll over your money into an IRA or your new employer's 401k plan. These two options allow you to avoid taxes and penalties and have a more financially sound retirement. Having all of your money in one place also makes it easier to manage, plus you no longer have to deal with your old employer.
Ask your current employer if they accept rollovers from old 401k plans. Unfortunately, not all companies do. If you current employer does allow rollovers, decide if their investment options are sound. Generally, you want a 401k plan that has many stock, bond and money market options and does not require you to purchase a large amount of company stock.
Research Individual Retirment Account (IRA) options and speak to a financial adviser. IRAs do not have with the same investment restrictions as employer 401k plans. You can open an IRA through a bank, brokerage firm or mutual fund company. If you chose to roll over your money into an IRA, you must first set up an account. Setting up an IRA is free, but some require a minimum investment of $1,000. After the account has been set up, ask your former employer to transfer the money into your new IRA.
If you have initially cashed out your 401k, you can still put it into an IRA. If you do this within 60 days of receiving your check, you will receive a 20 percent credit at tax time.
Countless financial advisers, including Cameron Huddleston of Kiplinger.com, advise against cashing out your 401k. Not only do you have to pay penalties, but you jeopardize your retirement.