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Should workers roll over or terminate 401(k) plan after being laid off?

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Depending on how your 401(k) plan is set up, chances are high that you will no longer be able to deposit money into it (and your employer won't match your deposits). The useful part about this is the money is treated like a savings account. Wall Street will continue to try to make a profit off of it and by the time you retire, your balance may be higher. On the other hand, there is no guarantee that the amount won't be lower. Until the year you've speculated that you will retire, that amount will go up and down. If you choose to terminate your account, the federal tax rate for early withdrawal can be 10 to 20 percent of your total balance. The only upside to this is the automated withdrawal may be useful for tax purposes. If the Feds take more before you receive the rest of the balance into your account, that means you'll have to pay less back in taxes during tax season.

What about a Roth IRA or traditional IRA?

If you want to continue saving for retirement, on that same balance, these are the alternate option.

Both the Roth IRA and traditional IRA must have at least $1,000 for any of the Vanguard Target Retirement Funds or for Vanguard STARĀ® Fund.

For a Roth IRA in the 2013 or 2014 tax year, your maximum contribution can only be $5,500 (if under age 50) and $6,500 (if 50 or older). Contributions are also limited to your income.

For a traditional IRA in the 2013 or 2014 tax year, your maximum contribution is the same, but there are no additional limits based on income.

What if I take out a withdrawal after rolling my account over after age 59 1/2?

For a Roth IRA plan, you won't pay taxes on withdrawals of your contributions. You also won't pay taxes on withdrawals if you are age 59 1/2 and older, and had the account for at least 5 years. Ordinary income taxes on withdrawals of earnings still apply.

What if I take money out before I reach age 59 1/2?

For the traditional IRA plan, you're required to pay a 10 percent federal penalty tax on withdrawals for contributions and earnings. With the Roth IRA plan, you only pay 10 percent federal penalty tax on earnings but not contributions.

What's the biggest difference between both plans when it comes to taxes?

With a Roth IRA plan, withdrawals will be tax free after retirement (age 59 1/2 or older), but you'll pay your taxes now before you retire. With a traditional IRA, you would pay taxes later while in retirement. Your withdrawals are tax-deductible.

Should I choose CDs or money mutual accounts instead?

Speak with your bank about interest rates, minimums to open an account and the cost of early withdrawal. (It's strongly recommended that if you put money into an account to save it, actually attempt to save it in full.) Check your 401(k) statements to see what the profits look like. You may find that a Certificate of Deposit (CD) is a bit tamer. For example, with Chase Bank, a CD for $1,000 to $9,999 can make a profit for anywhere between 0.02 percent to 0.90 percent. For $1,000, that profit range is $20 to $900 for 1 month to 10 years. The more you invest, the higher the profit.

It may be a good idea to withdraw your entire 401(k) amount and invest it into CDs. There will be no guessing games. But it may just as good an idea to hope that your Roth IRA plan or traditional IRA plan may make you better profits for your buck. The problem is there's no way to know with 401(k) plans and IRA plans until you actually retire. With CDs, you know the profit as you go along and have the option to reinvest CDs once they mature (reach your agreed upon expiration date).

Follow Shamontiel on Pinterest for all her latest Chicago finance, employment and savings tips, or subscribe to her Chicago Personal Finance channel at the top of this page.



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