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Oct 31 2011 12:00AM

Question


I have been terminated from my employment. What is the best way to deal with my 401(k) and profit sharing money?

Answer

“Some employers allow former employees to leave their 401(k) funds in the plan, but many prefer that you transfer them out, particularly if you have a balance of less than $5,000,” said FPA member Delia Fernandez, CFP®, MBA. “Your former employer should send you instructions on your options.

“Many people choose to transfer those funds directly into a rollover Individual Retirement Account (IRA) — another type of retirement account. A direct transfer avoids taxes and possible penalties on early withdrawals. A rollover IRA often provides you with a wider range of investment options.
Many types of financial institutions have such accounts, including banks, credit unions, brokerage firms and mutual fund companies.

Typically, you open the rollover IRA account first and then provide that account information to the 401(k) and profit sharing administrators so that they can send the funds directly. Sometimes, however, they send you a check payable to that new institution or "custodian" of the rollover IRA for your benefit. If that's the case, be sure to keep track of when that check is mailed and watch for its arrival. It's critical that you deposit that check as soon as possible after it's issued into the rollover IRA account to avoid tax problems.

“You will also receive a 1099-R the following year describing your withdrawal from the 401(k) and profit sharing plans if the amount was greater than $10. Please be sure to attach it to your tax return and consider consulting your tax adviser on how to account for that distribution and subsequent transfer to a rollover IRA.

“Finally, when you join a new company, their 401(k) may allow you to transfer those funds in the rollover IRA into your new 401(k). Many people prefer consolidating their funds rather than having multiple IRAs.”

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