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This chapter is from the book

Know When to Leave

So when does it make sense to leave the money in your company's 401(k) plan? If you want to have the ability to borrow money from your retirement plan, an IRA does not offer that option, whereas a 401(k) does. However, borrowing from a 401(k) is generally not the best choice because even though you are essentially borrowing from yourself, you miss the tax-deferred compounding that is the main reason you have a 401(k) to begin with. In addition, if you leave your job, voluntarily or involuntarily, you must pay back the loan within 60 days—with interest. Otherwise, you must pay not only income tax on the loan amount, but a 10 percent early withdrawal penalty, to boot. Somehow, it does not seem worth the risk.

It might also make sense to leave the money with your employer's 401(k) plan if the fees are considerably less than what you would be responsible for paying with your own self-directed IRA. However, it is important to again do your homework to make sure that the lower costs of your company's 401(k) plan are not limited to participants in the plan who are current employees of the company. Some plans have higher fees for participants in the company 401(k) plan who are no longer employees.

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