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What to Do with Your Retirement Plan Money

© Ann Needle

Lucky, lucky you - you're changing jobs, so now you can get at that 401(k) money you've put away in this plan. While you were working at the job offering the 401(k), any pre-retirement withdrawals (if allowed at all) usually meant paying income taxes owed, plus a 10% tax penalty, on the withdrawn amount. Now that you're leaving, you can take some of that money and skip the 10% penalty (you still pay income tax), right?

Not really. In fact, taking a withdrawal may cost you more now than it would have if you did it while you were at your job.

Once you leave your job, if you are issued a check directly for your 401(k) money, 20% will first be withheld by the Internal Revenue Service (IRS). The 20% withholding will be recognized as taxes paid when you file your income tax at year-end, so you will get this amount back (if you didn't owe taxes and decide to deduct them from this 20%) only after you file your tax return.

Then, in order to avoid having the withheld amount treated as a distribution (again, that means forking over income taxes plus 10%), you must roll that money into another 401(k) or "qualified" plan or traditional individual retirement account (IRA) within 60 days of the check being issued, and replace that 20% withheld with other resources. So, if you have a $50,000 401(k) account paid out to you, expect $10,00 to be missing (20%) when the money arrives. And, to get the $10,000 back, you need to put $50,000 into the 401(k) or traditional IRA.

Plus, if you are under age 59 ½ and don't put this money into another 401(k) or traditional IRA within 60 days of this payout, you'll owe income tax and the 10% penalty.

More importantly, if withdrawn, this money could lose even more in opportunities for growth, impacting your future retirement security.

Some Better Deals for Your Retirement Bucks

Here are three ways to avoid these tax implications, and keep your money intact for the future -

Keep the money in your former employer's plan. You have this option if your account balance was more than $5,000 at any time. This way, you sidestep tax consequences of an early withdrawal, and you could transfer this money to a new employer's plan or an IRA later on.

Transfer the money directly to a new employer's 401(k) or other qualified retirement plan. This is a very attractive option if you have a new job lined up offering a plan that allows transfers. You continue to enjoy the benefits of these plans including tax-advantaged growth potential, regular contributions, and perhaps a company matching contribution.