What to do with your 401K.

Dear Linda:

I’m changing jobs and am not sure what to do with the 401 (k) that I began with my previous employer.

Financially challenged

Dear financially challenged:

You have three options: leave it with your previous employer, take cash, or roll-over your assets into an Individual Retirement Account (IRA).

The problem with leaving it with your previous employer may be that the 401 (k) isn’t invested diversely enough to be advantageous. Before deciding, begin with analyzing your retirement needs and developing a comprehensive plan to meet them.

Determine the age you’d like to retire and find out what you can expect from Social Security (visit www.ssa.gov to determine your benefit). Then calculate all your expenses and add 4% per year for inflation (Remember to add in the cost for health insurance and medicine, if they won’t be covered by a company during retirement). Deduct that total from your Social Security income, and you have the supplemental amount your retirement account must generate.

Contact a financial planner or investment representative to guide you in this effort. Be sure this person has your best interest in mind and isn’t representing financial products that divide loyalties.

After this planning, you can decide if you want to cash the 401 (k) or reinvest the money into a new or existing Roll-over IRA. The drawbacks of cashing the 401 (k) are the various taxes (state and local, if applicable, and 20% federal income tax) and penalties you’ll pay, particularly if you’re under age 59 ½ (an additional 10% for early withdrawal). In addition to dramatically reducing the value of the withdrawal, you’ll be defeating the purpose of saving for retirement that the 401 (k) originally intended.

Roll-over IRAs generally offer a wider variety of investment options, so you can customize them to better fit your investment needs. Roll-over IRAs also continue to defer income taxes, allowing more of your money to work for you.