Keep your hands out of that retirement cookie jar! If you lose your job, resist the temptation to dip into your 401(k) account. At any age, cashing in your 401(k) means paying tax on every dime you withdraw, unless you've made after-tax contributions. Even worse, if you’re under age 55 when you leave your employer and begin taking withdrawals, you’ll also be hit with a 10 percent tax penalty. And 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 your 401(k) 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 to your new employer's 401(k) plan if it accepts rollovers.
Ask your former boss to send your retirement 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.
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.
TurboTax will help you deal with tax issues related to losing a job—and help you get the biggest possible tax refund.