Jenny

With all the lay-offs and downsizing happening over the past several months, many employees who had invested in their company’s 401(k) are left wondering about what to do with the 401(k) plan they invested in.  Suze Orman, author of several books on personal finance offers the following advice in her book – The Money Book for the Young, Fabulous &  Broke:

1. Do not cash out your 401(k).  Why, you are wondering shouldn’t you cash out?  Now is the time when you could use the extra cash.  Well, Suze says if you cash out now, you will pay an income tax penalty on that withdrawal, in addition you will also pay a 10 % penalty for making an early withdrawal.  Finally, if you withdraw or cash out, you will no longer have that money working and growing for you for your retirement.
2. Do not leave the money where it is. Again, you ask, why not?  Well, if you leave the money in your old company’s plan, you will be limited by the funds offered in that plan. By rolling the money over into an IRA, you will be able to invest your money in anything you want.  If you recently got a new job, Suze also cautions against rolling over your 401(k) from your old employer plan to the new employer’s plan.  Why? Again you will be limited by the funds offered in the new employer’s plan rather than being able to invest freely into funds of your choice.
3. Do an IRA rollover. Suze suggests that this is the best possible move.  Doing a traditional IRA rollover means that you can transfer your 401(k) balance out of your old employer’s plan into an IRA account that you set up at a discount brokerage firm or a no-load mutual fund company that has low expenses.  The advantage to doing a roll-over into an IRA is that you will not incur any taxes or penalties.  Why? Because you are simply moving your money from one tax-deferred retirement plan to another.

If you found this advice helpful and wanted to find out more, you can pick up a copy of Suze Orman’s book The Money Book for the Young, Fabulous &  Broke, or watch her on CNBC-TV on Saturdays, check your local listings for air time.