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When facing sudden and unexpected financial burdens, your 401(k) might be where you look for relief. After all, you contribute to it regularly, and it will be years before you need the money for retirement, right? Unfortunately, cashing out your 401(k) comes with some significant penalties, so unless you’re facing something like a foreclosure, the funds are probably best left in some type of retirement account.
When you change jobs, as the vast majority of people do every five years or so, you have some decisions to make. Your existing 401(k) can follow you into a new 401(k), roll into an IRA or become cash. Sometimes, if you meet minimum amounts, you can even leave your 401(k) right where it is. It all depends on what your new employer offers and how you want to handle the change. Be sure to research the best ira companies before making a decision.
When possible, leaving the money in your 401(k) is often the best bet. These funds enjoy more protection against bankruptcy and other debt collection issues than an IRA does. So, if your new employer doesn’t offer a 401(k), you might want to leave the money where it is, if you’re allowed.
Consolidating all of your retirement funds into a few, manageable accounts makes it easier to track your savings. You’ll be able to quickly see how close you are to your goals and make adjustments as needed.
The other option for managing an old 401(k) is to take the money out. The problem with this is the tax penalty. When you take money out of a 401(k) early, you owe additional taxes. This can quickly eat into your retirement savings. If you need money to cover a debt, there are other options. Debt consolidation loans and negotiating with creditors can help you manage your debts without dipping into your retirement savings.
Ultimately, it is usually advisable to keep those retirement dollars where they will do you the most good in the long run – in a retirement account. If you have a large medical bill or need help with your mortgage, you might cash out some of your 401(k), but avoid it whenever you can.
If you do need the cash now, try to catch up as soon as possible. A few options for pulling out cash allow you to repay the money within a truncated timeline. For example, if you cash out to roll over independently, you have 60 days to open the new retirement account. It’s always a good idea to discuss your options with a financial advisor before making any major decisions.