What are some info a/b comapny 401k to avoid my mistake again?

[dgcoupe]

I can recall couples years back I was with a company for about 4-5 months only and my 401k was only like 300 bucks and i got a letter stating i have to cash it out and get penalize since it wasn't $1000 is it liek this to all companies? and yes i lost half of it when i cashed it out.

[buildmybudget]

This can occur when you remain employed with a company for only a short period of time. A 401k consists of pre-tax payments you make from each of your paychecks. So once the company decided to close your account and distribute the funds to you, the funds were taxed. It may have seemed like you lost more money if the company had been matching your investment and the matches were not fully vested. That would mean that whatever the company put into your 401k account was returned to them and whatever you put in was returned to you, less the taxes you would have paid if it was ordinary income.

[dgcoupe]

very true!!! so to clarify what a 401k is... its comes out of your paycheck taxed free but when u are old enough to retire 60+ ish, u can take it out without any of it being taxed or will it be taxed?

[buildmybudget]

401k contributions are pre-tax, so each time you get paid at work you are investing pre-tax dollars. When you reach retirement age you can begin receiving distributions at your then current income tax level.

[dgcoupe]

thank you build!!

[disneysteve]

I can recall couples years back I was with a company for about 4-5 months only and my 401k was only like 300 bucks and i got a letter stating i have to cash it out and get penalize since it wasn't $1000 is it liek this to all companies? and yes i lost half of it when i cashed it out.

The reason you lost that money is because you cashed out the account. That is considered an early withdrawal and is taxed and penalized. What you should have done was to roll it over into an IRA. You would have avoided the tax and penalty by doing so and you would have kept that money invested and growing for your retirement.

[skydivingchic]

I'll add a bit to what has been said. Many employers allow you to leave money in their 401k plans after you leave, but will require you to have a certain balance to do so. If they do not allow you to leave money in their plan or you do not meet the minimum balance, you have to do something with that money. They should give you information on your options (leave money where it is, roll over to IRA, or cash out) when you leave. The best thing to do is as Steve said - roll it into a traditional IRA. Any of the brokerages (Vanguard, Fidelity, etc) can help you do this. You only have a certain time period after leaving an employer to do this (60 days if I recall correctly). If you had rolled the money directly into a traditional IRA there would have been no taxes or penalties taken out. However, you cashed it out. Since you were under 59.5 years old, income taxes and penalties were assessed on the money per IRS regulations.

Even if an employer allows you to keep the money in their plan, the general advice is to roll it into an IRA. This is because employer plans usually limit your options as to which funds/stocks/etc you can put your money into. There are also sometimes high fees associated with the available funds. With a brokerage account however you are able to choose which stocks/funds/bonds/etc you want and therefore have more control over your money.

As build alluded to, if your previous employer had put in any matching funds, those dollars likely would have been taken out when you cashed out. Most employers have a vesting schedule for matching funds which require you to work a certain number of years (generally 3-5) before you get to keep all of those matching dollars. This is another thing to investigate with your new employer. Some employers have a tiered vesting schedule such that the portion of the matching funds you get to keep increases as your time increases to a point that you are 100% vested. For example 20% after 1 year, 40% after 2 years, etc until you hit 100% at 5 years. The vesting schedule only applies to any funds the employer put in under the matching program - you get to keep all dollars you had withheld from your paycheck no matter how long you worked.

Bottom line - when leaving an employer use a brokerage of your choice to set up a traditional IRA and roll 401k money into that IRA. In your case it was only $300, so its not the end of the world. Mark it down as a lesson learned and be prepared with knowledge next time you change jobs.