Spencer says when you prematurely withdraw funds from a 401(k), you risk losing up to 40 percent in taxes and penalties. For example, if a 30-year-old who plans on retiring at age 65 cashes out a $20,000 401(k), he would only take home $12,000, thereby losing $8,000 right off the bat. If he had allowed that same money to grow, Spencer says he would have had $150,000 at retirement.
Spencer says rolling over your retirement savings money into an IRA is one of your best options, and he offers this advice for getting started:
- Know where you want to open up an IRA. Research reputable financial institutions that handle these types of transactions, Spencer says.
- Have your 401(k) statement handy. Spencer says there's no need to fear mounds of paperwork—your 401(k) statement is really the only thing you'll need to complete the rollover.
- Find out the amount of any annual fees. Spencer says most companies charge about $20 to open an IRA for a modest amount of money, for example, $10,000 to $20,000.
- Find out what types of mutual funds the company you're considering chooses. "All companies that offer mutual funds are required to tell you how much they cost, and a reasonable number for a mutual fund would be in the 1 percent range," Spencer says.