When you are terminated from your job, you do not lose your 401k account. The account is yours, and you have a right to move it to your new employer or to manage it yourself. You will need to complete a rollover to do so. This simple process will help you not only avoid taxes and fees but also set you up to begin making contributions to a new account, such as an individual retirement account (IRA), immediately.
401k Rollover Process
When you are terminated from your job, contact your old 401k administrator to determine if you are eligible for the rollover. As long as your status is officially "terminated," you will be eligible. If your status has not changed, contact your old human resources department in order to get that step accomplished. Next, your previous plan administrator will provide you with rollover forms. You will need to declare where the funds will go. Therefore, it is important to set up an IRA prior to the rollover. You may not need to fully open the account. In some cases, you must only notify the new provider that you would like to open the account with the rollover funds. Once you complete and submit the forms, it is up to the plan administrators to complete the rollover into your new IRA. It is your job to double check to make sure the process occurs within 60 days.
401k Rollover Warnings
Some employees chose to do an indirect rollover, taking the funds into their personal checking or savings account first, rather than a direct rollover. This is a tricky option with many potential drawbacks. If you hold the funds too long, you will be taxed and penalized for an early withdrawal. If you use the funds for any income-producing investment, you may also be penalized by the Internal Revenue Service. Therefore, if you elect this option, make sure the funds are deposited into a new retirement account within 60 days.
Recovering Lost 401ks
Even if you were terminated from your job some time in the past, you still have a right to recover and rollover your lost 401k. Your employer cannot shut down or use your 401k. But it may open an IRA on your behalf and deposit the funds there. Check with your previous employer first to determine the status of your lost 401k. If your employer no longer has the information, you can use the Department of Labor's free website to help find your old account.
Contributing to the New IRA
Once you successfully roll over your old 401k into a new IRA, you will not longer have a connection with your old 401k administrator. You are solely in charge of making your contributions with an IRA. If you get a new job, you may ask to deduct contributions directly from your paycheck into your IRA, but this will only be possible if your employer sponsors this option. Otherwise, you can continue making payments independently to your IRA regardless of where you work or if your employer offers benefits. If you want to change your investment options, your contributions or other terms in the future, you must contact the institution that holds your IRA.
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