Retirement > 401(k)s & IRAs
A job loss and your 401(k)
graphic October 8, 2001: 7:00 a.m. ET

If you lose your job, don't forget your 401(k); start by paying off loans.
By Staff Writer Andrew Stein
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  • How investors can use the MONEY 100 list of mutual funds - Sep. 28, 2001
  • Keep funding your 401(k) despite turmoil - Sep. 21, 2001
  • 401(k) activity hits record - Sep. 18, 2001
    NEW YORK (CNNmoney) - You knew your company was struggling amid the slowing economy, but you didn't know it had come to this. The pink slip said it all -- your job is the company's latest cost cutting move.

    Your first thoughts turn to everyday priorities: medical insurance, mortgage, and food. But don't lose sight of your long-term financial goals, especially your 401(k).

    "One month you're as busy as can be, the next month you're walking," says Deb Neiman, a certified financial planner (CFP) from Massachusetts. "Don't let emotions get the best of you after a job loss ... retirement assets are crucial."

    Now what?

    Most financial pros agree the first thing you should do if you get laid off is stop making contributions to all retirement plans, since you'll probably need the money for everyday expenses. That's especially true if you had taken out a loan against your 401(k) -- most plans require you to repay a loan within 30 to 60 days of leaving the company.

    After that, the main decision to make is what to do with your money.

    Some companies allow you to keep assets in the plan after you leave, depending on the size of the portfolio. And if you had a great 401(k) with many investing options, you might want to leave your money in it.

    But most people are better off rolling their 401(k) money over to another retirement plan, like an IRA. Robert Veasey, a CFP from Rhode Island, says companies may make changes to 401(k) plans, but the new offerings will not always be available to former employees.

    And assets left in 401(k) plans may be subject to administrative fees. Chris Cooper, a CFP from Ohio, said one of his clients left her 401(k) account with a former employer. The account was only about $5,000, but the plan charged $50 per month in administrative fees - fees that will make a serious dent in the plan's returns each year.

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    Another drawback to leaving your 401(k) money with your old plan is the possibility of the company automatically ejecting you from the plan. Sometimes, for example, a company will send out rollover forms after you leave the job. If you ignore the forms, the company may cash out your account and send you a lump-sum check. You could wind up with a much smaller payout, since the lump sum will be considered a distribution with a 20 percent withholding fee and a 10 percent early withdrawal penalty.

    The IRA advantage

    Planners agree the biggest advantage to rolling a 401(k) to an IRA is having more investing options and control. 401(k) plans often have limited choices, sometimes as few as three or four options. But an IRA will give you hundreds, if not thousands, of mutual funds to choose from.

    For those employees who purchased shares of company stock through 401(k) plans, there is another benefit to a rollover, Neiman says. For example, let's say a person originally purchased $10,000 of company stock, which is now valued at $50,000. The $50,000 in stock may be transferred into a regular brokerage account and the person will only have to pay taxes on the original investment of $10,000. The remaining $40,000 that was transferred will not be subject to capital gains tax until the stock is sold.

    And if you need to sell the stock in order to transfer the proceeds into an IRA, don't worry if the market is down, financial planners say. Although you'll sell your shares at a low price, you'll be buying stock back at the same bargain-basement levels once the money lands into your IRA.

    In the event of a cash shortage, Cordaro says liquidating the 401(k) should be your last option. "You can basically rip every dollar in half that you pull out of the plan," he said. "Keep half and send the other half to Washington in the form of taxes and a 10 percent penalty." graphic


    How investors can use the MONEY 100 list of mutual funds - Sep. 28, 2001

    Keep funding your 401(k) despite turmoil - Sep. 21, 2001

    401(k) activity hits record - Sep. 18, 2001

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