My Old Boss Kicked Me Out of My 401(k)! What Now?

×
401K (Cassandra Hubbart, AOL)
Cassandra Hubbart, AOL
Using a 401(k) or other employer-sponsored retirement plan is one of the best ways you can set aside money for your old age. But as many workers who've moved on from past jobs have recently discovered, employers don't want to keep footing the bill for their former employees' retirement savings. So they're kicking those accounts to the curb.

What's Happening?
Until 2005, employers routinely cashed out small 401(k) plan accounts when workers quit. Previous law allowed them to sell 401(k) assets and send checks to workers who had less than $5,000 in their accounts, forcing the recipients to figure out on their own how to roll over those amounts into IRAs to avoid the extensive taxes and penalties that would otherwise apply.

Current law, however, only allows that option for workers with less than $1,000 in their accounts. For those with between $1,000 and $5,000, employers have to go to the trouble of setting up an IRA for their former employees.

That's enough of a hassle that many employers didn't bother doing it. But as administrative costs of managing 401(k)s have risen, forcibly pushing former workers into IRAs has gotten more popular.

Why Is That Bad?
In general, rolling over an old 401(k) to an IRA can be the smartest move you can make. That's because it gives you access to a wider range of investment options that are often less expensive. It also helps you avoid the tax hit of just depositing old 401(k) money into your regular bank account.

But for those with tiny account balances, those low-cost options are a lot harder to find. Without the clout that a large 401(k) plan brings, you won't get the same lucrative deals that many major employers can get, including low-cost institutional mutual funds and other favorable investments.

Two Ways to Deal With Being Dumped
If your former employer boots you out of your 401(k), realize that you have options.

If the IRA that your former employer sets up for you isn't what you want, you have the right to transfer that money to the provider of your choice. That way, you can pick a lower-cost IRA that meets your needs.

Alternatively, if you have a 401(k) account with your current employer, you can roll the IRA money into that account. That strategy works best if you like your current plan's investment options better than what you have access to elsewhere.


Increase your money and finance knowledge from home

How to Buy a Car

How to get the best deal and buy a car with confidence.

View Course »

Goal Setting

Want to succeed? Then you need goals!

View Course »

TurboTax Articles

A Tax Guide for Solopreneurs: Self-Employed Tax Tips

Flying solo can be the ultimate business adventure. When you run your own business and you're the only employee, you truly hold all the cards and earn the freedom to achieve your ideal work-life balance. Working for yourself also brings tax advantages not available to those who work for others. It's important to understand the tax rules that apply to the self-employed to profit the most from these.

Can I Claim Medical Expenses on My Taxes?

Medical expenses can take a bite out of your budget, especially if you have unforeseen emergencies that are not fully covered by your insurance. The Internal Revenue Service allows taxpayers some relief, making some of these expenses partly tax-deductible. To take advantage of this tax deduction, you need to know what counts as a medical expense and how to claim the deduction.

What Is a 1099-G Tax Form?

The most common use of the 1099-G is to report unemployment compensation as well as any state or local income tax refunds you received that year.

Add a Comment

*0 / 3000 Character Maximum

2 Comments

Filter by:
drex88

Roll over or into an IRA and then covert to a Roth IRA (pay the taxes next year) That way u get all the advantages of a Roth.

June 01 2013 at 10:07 PM Report abuse +1 rate up rate down Reply
Mike

"Without the clout that a large 401(k) plan brings, you won't get the same lucrative deals that many major employers can get, including low-cost institutional mutual funds and other favorable investments."

Baloney. 401Ks are severely limited. And you can get plenty of low-cost deals either through ETFs or mutual funds like Vanguard. And holy cow, when are we going to stop this dumbing-down of the population. You can call Vanguard, Schwab, etc and they'll walk you through opening an IRA. Also, plenty of information online. Educate yourself. Whatever you do, don't cash the check. Open an IRA and deposit it. Otherwise, you'll be paying taxes (and will probably waste the cash).

March 31 2013 at 5:03 PM Report abuse rate up rate down Reply