Changing jobs can create havoc with retirement savings. Too many employees take advantage of this opportunity to get their hands on 401(k) money as if it were a license to do so.
At any age, cashing in the 401(k) means paying tax on every dime you withdraw, unless you have made after-tax contributions. If you're under age 55 in the year you leave your job, you'll also be hit with a 10 percent tax penalty. Keep in mind that short-circuiting your retirement savings could be disastrous for your long-term financial health.
If you have more than $5,000 in the account, you can leave your money with your former employer, where it will continue to grow. However, you may be better off transferring your 401(k) balance to an IRA, where you would have almost unlimited investment options, or your new employer's 401(k) if it accepts transfers and offers favorable investment options.
If you plan a rollover to an IRA or new employer's plan, ask your former boss to send the money directly to the new account. If you request that the money be paid to you, with the intention that you'll personally deposit it into the new plan, the law requires your former plan sponsor to withhold 20 percent of your money for the IRS.
You can also roll over 401(k) money directly into a Roth IRA. You will have to pay tax on the amount you shift to the Roth IRA. However, withdrawals at retirement are generally tax-free.
If part of your 401(k) is invested in your company's stock, be sure to check out the special rules for "net unrealized appreciation," a mouthful of a tax-term that could save you money. Count on TurboTax to handle all your life changes with easy, customized solutions for the biggest refund results.