If you have ever left a job where you had a 401(k) you’ve asked this question. Depending on your circumstances, the answer may differ from case to case. While nothing beats advice from a professional who can evaluate your situation fully, here are some basic situations that may lead to the right decision.

Is your human resources department reliable and easy to communicate with?

This is the stickler that most people can answer with a resounding NO!

If you keep your 401(k) with a previous employer, it will typically be the human resources department at that company that you deal with whenever you want to make a change to the account. If they are approachable and easy to communicate with now, they will likely be so after you move on to your new employer.

If, however, they are hard to set an appointment with, incompetent or disinterested, or if you have burned any bridges with them, you won’t want to leave your money with them.

Are you satisfied with the options your 401(k) had?

This is different than, “Did the investments in your 401(k) do well.” Rather, you have to evaluate the different investment options available to you and determine if there will be enough variety to suit your needs in different circumstances. If you’re 27 and moving on to your second job, the stock funds you’re in may be perfectly suitable, but if the 401(k) doesn’t have adequate fixed income (bond) options, you may need to make changes as you get closer to retirement.

If the options available in your 401(k) were not adequate, it’s time to shop around for an IRA, where you’ll have more investment options.

Are you in dire need of money immediately?

Most investment advisers and financial planners do not consider this possibility, mainly because of the tax consequences and penalty, but there may be times when you need to cash in some of your 401(k). Sometimes things just don’t work out as planned.

If you find yourself suddenly unemployed, with a mortgage, car payment, rent, a family to feed (not to mention your own voracious appetite), and, to top it all off, you need a new suit for interviews, it may be appropriate to take some of that 401(k) and put it to good use until you get to that next rung on the ladder.

Obviously, it’s a last-ditch effort, and adjusting your lifestyle is the first in a long series of steps that you need to take to get back on solid financial footing. But remember, by cashing out a retirement account prematurely, you not only have to pay taxes on the proceeds, but also will be penalized 10% for the early withdrawal of funds.

If you do find yourself in this situation, do it cautiously, and make every effort to preserve as much as you can to rollover into a qualified plan once you are back on your feet, since you have 60 days from the withdrawal to rollover into an IRA.

Do you want to manage multiple accounts?
You can have as many retirement accounts as you want, but they will have different fees associated with them and different investment options available to them.

If you’re not interested in evaluating each account every six months, it may be best to consolidate your retirement savings into a single IRA or a(new employer’s) 401(k).

If you are going to rollover your funds…

The most important thing when rolling over into an IRA is to do it quickly: you have sixty days before the IRS considers it a withdrawal and, therefore, taxable and penalized.

Depends… This question is a bit confusing, so I’ll go over all possible scenarios that the user may have meant, and I’m going to separate this into two columns. This one will deal with losses in a Traditional IRA. The next column will deal with losses in a Roth IRA.

Q: Can you write off losses in an IRA?

A: No, not unless you’ve made non-deductible contributions to your IRA.

A Traditional IRA is tax deductible in the year that you invest the principal, and it is only taxed when you redeem (sell, or cash out). So, let’s say I invested $1,000 in an IRA in 2005 and the value has fallen to $700. I’ve already written off the $1,000 back in 2005, so I cannot make a second deduction now that I’ve lost money.

If I redeem my IRA and get the $700, then I will have to pay taxes (plus penalty, since I’m not of retirement age) on the $700. The $300 is gone, and it’s as if I never had it to begin with; I never paid taxes on it, so I can’t write it off.

Q: Do you pay taxes on losses in an IRA?

A: No.

Remember, a Traditional IRA is written off to begin with. So, you will only pay taxes on what you take out of the account.

Take the scenario above, where my $1,000 investment decreased to $700. I do not pay taxes on the $300 loss, I only pay taxes on what I take out (up to $700).

If you really want to dig deeper, here’s some light reading: IRS Publication 590: Individual Retirement Accounts (IRAs)

This is a question I recently got, and the answer is simple: yes, but the maximum annual IRA investment is a total (cumulative) amount, not per account. In other words, if you have four different IRAs with four different companies and your maximum IRA contribution is $4,000 for the year, you can only contribute $4,000 total, to all four accounts.
A more important question is: should you have different accounts?

Most investment advisors will tell you no, partly because it will be too difficult to manage, and partly because they want all of your money to be going to them and their funds.

While there is more to pay attention to when holding multiple accounts, there is usually little active management that goes on in an IRA. You open the account, buy the securities (usually mutual funds or money markets), and hold.

There isn’t really a lot of management with an IRA. Every year you’ll want to make sure your asset allocation is appropriate. You’ll add funds as you can.

The benefit of holding multiple accounts is no different than the benefit of holding different investments: diversification. Maybe one company is offering low fees but has a limited selection of mutual funds available. Another company may have slightly higher transaction costs but a wider variety of funds.

Sometimes, opening a new account is the only way to invest in a mutual fund you really would like to hold in an IRA. If your current broker (or 401(k), or SEP IRA, etc.) does not offer a particular fund, for example, you may have to open an account with another broker just to hold a fund in a tax-deferred account.

The downside is cost… maybe

Each company you have an account with will likely charge you a fee for management, but some discount brokers only charge for purchases and redemptions. As a result, you should have as few accounts as possible.

So, take a look at account fees and determine whether it’s worth it to pay each company the fees it is deducting from your bottom line.

The important thing is that you are satisfied with your investments and the way the management company reports your holdings, returns and losses.