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Clark Howard's Tips

What to do with a 401k when you leave a job

June 29, 2005

When people leave a job, what percentage of people with 401ks cash out their accounts instead of rolling them over into an IRA?

Would you believe just under 90 percent?

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When you do that, you get eaten up in taxes.

The average tax burden is just under 40 percent because of penalties assessed for early withdrawal. So, if your former company sends you a check for $4,000 and you spend it, you'll have to pay $1,600 in taxes. So the $4K just became $2,400.

All you have to do is tell your ex-employer where you want the money to go and they handle everything.

Once you cross the $1,000 market, you can't be cashed out or mess it up. It's automatic.

So, should you leave money in the former plan or transfer it to another company?

If you're working for a big company, usually it's okay to leave the money in that plan. If you work for a small company, you're better off moving the money into an IRA.

But don't ever accept a check offered to you.

And, if you have a 401k plan at a small business, keep your eyes and ears open.

Watch how quickly your paycheck money is going into your account while you're working there. If your account doesn't go up when you get a deposit slip, it's time to think about moving on and moving your money.

That means the company is withholding 401k money to stay afloat.

Think about stopping your contributions, something Clark doesn't recommend often. And get the money into an IRA immediately.

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