Resist the temptation to cash out your retirement savings when you are fired or laid off from a job. Instead, roll it over into an IRA or a new employer’s retirement savings plan, so your money can continue to grow tax-free.

Resist the temptation to cash out your retirement savings when you are fired or laid off from a job. Instead, roll it over into an IRA or a new employer’s retirement savings plan, so your money can continue to grow tax-free.

Losing a job is a stressful experience. Adding to the stress is the decision you’ll have to make about what to do with your 401(k). The good news is that retirement plans are portable. That means you can take your nest egg with you when you leave a job. Let's look at the options available to you:

Rollover your retirement savings account into an IRA

If you are fired or laid off, you have the right to move the money from your 401k account to an IRA without paying any income taxes on it. This is called a “rollover IRA.”

If you decide to roll over your money to an IRA, you can use any financial institution you choose; you are not required to keep the money with the company that was holding your 401(k).

Ask the mutual fund company, bank or brokerage that will manage your IRA for an IRA application. Make sure your former employer does a “direct rollover”, meaning that they write a check directly to the company handling your IRA. If they write the check to you, they will have to withhold 20% in taxes.

Transfer your 401(k) to your new company’s plan

When you find a new job, you can move the money from your previous employers plan to your new employer’s retirement savings plan (if they offer one) without paying any taxes or penalties. Not all plans will accept rollovers; check with your new employer.

Leave your money in the former employer’s plan

You won’t be able to make contributions anymore, but this is an option. This is acceptable as a temporary solution while you look for a new job or research where to open your rollover IRA. But it's not recommended for the long term, because the company may change their investment options over time, and it won't be easy to ask questions or make changes if you're no longer working there. If your account balance is less than $5,000, the company may not allow you to leave your money in their plan at all.

Cash out. WARNING! If you take a “lump-sum distribution” instead of rolling your retirement savings account over to an IRA or a new employer’s plan, you will have to pay income taxes on the money. You will also pay a 10% early withdrawal penalty if you're under age 59 ½. Not only do you lose money, but you lose valuable time in building savings, and may never catch up. *

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* This hypothetical example assumes the following: (1) One annual $5,500 IRA contribution made on January 1 of the first year, (2) annual rate of return of 7%, and (3), no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees or inflation. If they did, amounts would be lower. Earnings and pretax (deductible) contributions from a traditional IRA are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free provided certain requirements are met. IRA distributions before age 50-1/2 may also be subject to a 10% penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for a 7% annual rate of return also come with risk of loss.