By David Carlson
Every day thousands of employees switch jobs from one company to another. One thing that needs to be taken care of in this process is the employee’s 401k. There are a few options available to the employee including cashing out their 401k and transferring the funds to a rollover IRA.
Are you trying to find out how to cash out your 401k from old jobs? You’re in luck. We’ve got some advice for you in this post on how to go about cashing out your 401k, as well as an alternative option to cashing out that may save you more money.
How to cash out a 401k
Cashing out a 401k from a previous employer is simple. Your previous employer should provide instructions for how to do this. If they don’t you should log into your benefits administrator (i.e. Fidelity) and choose to cash out your 401k.
Every employer is different, of course, and some may be more helpful than others. If you are in the dark as to how you can go about cashing out your 401k from your old job, consider doing the following:
- Talk to an HR rep at old job
- Talk to a rep from your 401k administrator (i.e. Fidelity)
Cashing out a 401k isn’t an ideal plan, though. It may be tempting to cash out a 401k when switching employers because who doesn’t like a large lump sum moved to their bank account?
Cashing out will hurt from a tax and retirement planning standpoint. Hypothetically speaking, let’s say you have $50,000 in a 401k account at an old employer. You learn how to cash out 401k from old job, and decide to move forward with cashing out. You’ll face the following fees and penalties:
- 10% Early Withdrawal Penalty – 10% or $5,000
- Federal Income Tax – 25% or $12,500
- State Income Tax – 8% (varies by State) or $4,000
Out of the $50,000 in your 401k account you will be left with just $28,500. Not quite the $50k you envisioned!
Instead of cashing out your 401k when you switch employers, consider other options such as a Rollover IRA. A rollover IRA is essentially just an IRA retirement account that 401k funds can be transferred to when an individual is switching employers.
Rollover IRA instead of Cashing Out a 401k
You may have initially read this post to figure out how to cash out 401k from old job. But if your interested in the alternative, more financially rewarding option of a rollover IRA, then read on.
There are a number of financial benefits of a rollover IRA. First, you can dodge the 10% early withdrawal penalty that comes with cashing out a 401k before retirement age. Second, you avoid both the Federal and State income taxes that you inevitably are faced with when withdrawing funds from a 401k.
Besides financial benefits rollover IRAs provide an additional benefit: they are extremely easy to set up. The reason that rollover IRAs are so easy to set up is because financial companies are desperate for your business. People switch companies every day, which means there are a lot of people who need to set up rollover IRAs. Because of this most financial institutions have made it as easy possible to have your 401k funds moved to a rollover IRA.
All you need to do to set up a rollover IRA is pick which company you would like to have an IRA with, and then simply contact them about setting up a rollover IRA. They will guide you through the process and do the processing on their end. After all, these companies set up rollover IRAs every day, so they know the ins and outs of the process.
Here are a few different companies that set up rollover IRAs:
- Fidelity
- Scottrade
- TD Ameritrade
- Charles Schwab
- Vanguard
- E*trade
Pick your favorite one and let them know you are interested in a rollover IRA. Remember, this will allow you to avoid penalties and taxes while also allowing you to continue to build retirement savings.
If you do decide to go with the rollover IRA option be sure to check out the FeeX tool. FeeX analyzes your retirement account holding and tells you how much you are losing in fees. The amount of fees an investment charges can vary, so being aware of what fees you are paying for the investments in your retirement account can be an important piece of information.
Hopefully you’ve found some guidance on how to cash out 401k from old job, as well as the benefits of going with the rollover IRA option.