Whenever you leave a job, no matter what the reason is, your 401k can come along with you.
Single moms, this is something you absolutely want to do – it gives you more control over your retirement savings. And, despite what some advisors may tell you, the process is really very simple. The trick is to make sure you do a direct 401k rollover, and transfer your money from one retirement plan account straight into another. As long as you do it the right way, you won’t have to pay a dime in extra taxes or IRS penalties.
Here’s the most important rule to follow: Make sure the rollover check is not in your name. If the check gets made out to you, the IRS requires a 20% withholding tax – that’s one-fifth of your retirement savings! Plus, if you miss the rollover deadline by even 1 day, your money will get hit with an additional 10% tax penalty.
How can you avoid that 30% tax hit? Simply open another retirement account that can accept the funds from your 401k. That new plan can be an IRA (Roth or traditional) or your new employer’s 401k plan.
When you do a direct rollover into another 401k or a traditional IRA, you won’t have to deal with any taxes until you start withdrawing the money. Rolling over into a Roth IRA will trigger immediate income taxes, but then your future withdrawals will be tax-free.
Once you’ve decided where to park your old 401k funds, ask your old 401k plan for a direct rollover – use those specific words – and give them your new account details. You’ll be notified when your funds arrive in the new account.
Last step: Decide how you want to invest your retirement money. If you’ve rolled over into a new employer’s 401k plan, you’ll be limited by their investment options, usually a dozen or so mutual funds. With an IRA (whether Roth or traditional), you’ll be have a much broader range of investment choices, including individual stocks and bonds, mutual funds, and ETFs (exchange-traded funds).