General 401K questions?

General 401K questions?
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? Just a little background - I have about 50k in CC debt, so saving right now doesn't make a whole lot of sense to me until I get it paid off. I took a job that has a pretty decent increase in salary and I can knock it off in 2-3 years. I'm 30 now, salary is close to 100k going forward which is a considerable jump from my previous salary - so I can get debt paid off then start saving 2/3 years down the road. with all the issues going on, my card companies keep bumping my interest although I have a spotless credit history. the 401k is only about 5 grand including the employer matches over the past 3 years.


Answers:

corgi1922:  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!
2008-08-20 06:07:25
Grant H:  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).
2008-08-20 07:38:10
Chosen Answer
MVD34:  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%)
2008-08-20 08:30:17