Taking Action When You Are Dropped From Your Old Employer’s 401k

Written by: Scott Sery

In a perfect world you would start a career when you are just out of college.  You would love your work, stay with the same company until retirement, and you would then be rewarded for your years of service with a nice pension that took care of the majority of your living expenses for the rest o your life.  Unfortunately, this is not a perfect world, and it has been discovered that a defined benefit pension is not a sustainable business model.  Instead, most employers will use a 401k program.  One that is a defined contribution plan that is managed by the employer, but can go with the employee when he or she quits.  But sometimes when an employee terminates their employment, they forget to bring their retirement plan with them to their new job, and since each employee costs the employer money to maintain their 401k, they may end up getting dropped.

Most defined benefit plans will have something built into their clauses that say if you terminate your employment you have a certain period of time to transfer your 401k out of the employer’s plan.  If it is not done in that time period, the employer can move the money.  If the account is small, usually $1,000 or less, the account may simply be cashed out, you will receive a check, and be liable for all taxes and penalties associated with taking an early distribution from your retirement account.  For larger accounts your money may be transferred to an IRA.  The advisor on the 401k will automatically become the advisor on the IRA, and often the money will just remain invested the way it was before moving.

If you have been dropped from your employer’s plan, and your account was cashed out, you still have some options.  The taxes on the distribution should be fairly small, considering the distribution was fairly small, so more often than not the easiest method is to just go buy yourself something nice.  But if you do not want to worry about the taxes you have 60 days to reinvest the money back into your IRA (or open a new one with this money) and still maintain your tax deferred benefits.

If your money has been rolled into an IRA, or you have received a notice that you can cash it out, the wisest thing to do is to keep that money invested.  Try to roll it into the new 401k at your new job, or at least move it into your IRA.  The worst thing that you can do for your financial health during retirement is to cash it out.  Check out the math behind even just a small distribution in this article.

The 401k, or defined contribution plan, will work best to your benefit if you keep taking your money with you, and you keep it invested.  Roll it into your personal IRA or into the plan at the next job, but whatever happens do not cash it out.  When you get dropped from your previous employers 401k, use the opportunity to beef up your IRA, but act quickly so you do not end up getting a forced distribution.


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Taking Action When You Are Dropped From Your Old...

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