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Don't Be a Pushover, Just Roll It Over

Alyce Lomax
December 17, 2008

Social Security's not working. Pensions are practically extinct. Now 401(k)s are in jeopardy -- and it's up to us to save our retirement. Our special report shows you how.

One of the biggest blunders workers can make is to cash out their 401(k) stashes when they leave a job. But a recent survey by Hewitt Associates found that a whopping 45% of people do just that. Even worse, nearly 66% of 20-something workers choose to keep the cash when they ditch a gig!

Small sums of money can become large ones over time due to the magic of compounding, so if you cash out now, you're not only paying fees and taxes -- you're seriously endangering your future nest egg, too.

Of course, even beyond the lure of quick cash in hand, "Just cut me a check" might simply sound like the easiest alternative in what can be a difficult and stressful transition between jobs. So let's demystify the process and go over exactly how to roll a 401(k) into an IRA, so you can be ready if the need arises.

Decisions, decisions
Right off the bat, there are a few possibilities for your 401(k) when you decide to leave a job.

  • You may be able to transfer your 401(k) to your new employer's plan.
  • If your former employer's rules allow it, you may be able to leave your 401(k) parked right where it is -- this may be simple (and certainly better than cashing out), but remember that you'll be responsible for related fees.
  • You may be able to put your 401(k) into what is more often than not the best option: a rollover IRA, which offers maximum flexibility.

A rollover IRA is a pretty nifty option, because not only can you select mutual funds for your holdings, but you can also choose stocks. Imagine buying blue chips like McDonald's (NYSE: MCD  ) or Coca-Cola (NYSE: KO  )