The numbers are staggering on how many Americans have lost their job in the last year.  The Department of labor reported 2.6 Million; the ripple effect will be felt for years.  The question is asked, what happened to your 401k, who is watching that money.  A CBS News study reported that more thany half of the displaced workers leave their money in control of their former company.   There are options for displaced workers.   Use this opportunity to reevaluate make the best of the situation.

Unfortunately most 401ks have a canned set of mutual funds to invest in with few alternatives. 

Option 1 – Take Control and move your money to a Self Directed IRA.  Workers that have been laid off can perform a 401k rollover.  This is a nontaxable event.  Choose a company with unlimited options and low fees.  Entrust is the largest Self-Directed Office in the United States.  It is important to know that 401k rollovers should be segregated and not moved to an existing IRA.  

Option 2 – Leave the Money in the account – This employer has  just asked you to leave and you are going to leave them with one of your largest financial assets.  While this might sound like a bad idea, you will be shocked how many people do this.  I am always amazed when I talk to clients about where their retirement money is located and they will tell me they left a job several years ago and have not looked at it since.  Please do option 1.  Don’t leave the fox in charge of the hen house.

Option 3 – Take the Cash, - Bad Idea.  If you cash out your plan, the IRS will withhold 20% for federal taxes and you could be subject to a 10% penalty for early withdrawal if you are under 59 ½.  Plus there could be state tax consequences.  Unless you are in dire straits, please consult your tax advisor before going this route so you know all the tax ramifications. 

Option 4 – Move it to your new jobs 401k – This IS not a bad if your new employer has a good plan.  While this is not a bad idea, you will still be limited to the choices that the plan offers.  Most standard 401ks will not allow you to self directed and there will only be a family of mutual funds to choose.  Be sure to ask if there is a provision in the plan that will allow you to Self Directed part of your retirement assets.

These are serious choices.  When you leave employment, just as you will be proactive in looking for a new job, you need to be proactive in taking control of your retirement assets.  Spend that extra time and contact the trustee of your former employer and take control with a Self Directed IRA.

Dave Owens is a CPA that specializes in retirement taxes and 1031 exchanges.  Please feel free to call him at 239-333-1031 or email him at owens@1031company.com.