General 401K questions?

Question

I am leaving my job at the end of the month and need to roll over my 401K.

1). Will I loose any money in the rollover

2) Which is better to roll over to - traditional IRA or a Roth IRA (my new company does not participate in 40X programs).

3) What is a "payment to self" option.

I'm thinking of cashing it in (I know I will loose a lot of money) to pay of Credit card debt - so would I do this payment to self option, then just pay my penalties during tax time or does it automatically get taken out?

Answer 1

Here are my short answers:

(1) No, if you do a direct rollover to a rollover IRA (which works on the same principle as a Traditional IRA).  If you have at least $10k in your 401(k), have Vanguard handle the direct rollover for you and invest all the money in one of their Target Retirement portfolio fund.

(2) You cannot rollover a 401(k) to a Roth IRA.

(3) Payment to self allows you to handle the rollover yourself (non-direct rollover).  This method is not recommended for most people.

Cashing out a 401(k) is not recommended by good financial advisers UNLESS the debt is so great that your taxes and fees (paid to cash the 401(k)) are easily recouped within 5 years and you are young enough to recover the retirement savings.  

Sit down and do the math:  How much is that 50(k) in CC debt going to cost you in 2-3 years it will take to pay it off using your regular income?  Is that greater than 35% of the 401(k)?  (10% penalty; 25% taxes...on average)  

How much have you saved?

How old are you?

A conservative adviser like me is going to tell you that if you are under the age of 30 and you can save at least 10% of your gross income from now until you are 68 for retirement and only retirement -- no more debt! -- then you can still have a comfortable retirement even if you give up your 401(k) balance now.  (If over 30 but under 40, bump that up to 12-15%)

Answer 2

1) At most your company may charge a check processing fee. If you elect a rollover you should not see any taxes or penalties deducted.

2) You can not roll a traditional 401k into a Roth (you can not mingle pre and post tax money). You can roll it into a traditional IRA however This is what I would suggest

2) Payment to self is most likely the cash out option.

If you cash it out you will see 20% automatically withheld for taxes. Then, at tax time this amount will be adjusted to the actual tax bracket you are in and an additional 10% penalty tax will be taken (off the original withdrawal) if you are under the age of 59 1/2. I would strongly caution you against taken it as cash. It would be better to take a small loan out at a bank then to use your 401k money.

Best of luck!

Answer 3

As to number 2, you actually CAN roll a 401k directly into a Roth beginning this year (2008).  I'd recommend looking into that option as the Roth has advantages that the traditional IRA doesn't (like tax-FREE growth, for one).