If I take that money & put it into my local bank using a new IRA account then I WOULD be penalized?
IRS code, §72(t)(2)(A)(v) allows you to actually access your 401k funds without penalty at age 55. So, if liquidity or access is important, keep it in the 401k. Moving the funds to an IRA will expand the access age with penalty to 59 1/2, so if you need the funds, moving to an IRA may not be a good choice. However, you can do a partial transfer of what's not needed for access to the Bank IRA.
One other detail - in my experience, 401k plans generally do not allow an employee to do a partial transfer and leave remainder in 401k so it has to be all or nothing. That said, you could take a distribution in part as cash and roll over the remainder to an IRA but per prior responses, if you want to maximize your access to the 401k without penalty prior to age 59 1/2, then best to keep as is
If you are age 55 or older and separated from services (i.e., laid off) then you an withdraw funds directly from your 401(k) and pay normal income taxes, but not the 10% early withdrawal penalty. As such, if you need money for various expenses, be sure to pull directly from the 401(k). Otherwise, you can roll your 401(k) funds over into an IRA and owe no taxes whatsoever. However, if you turned around and tried to pull funds out of your IRA, then you pay normal income taxes and a 10% early withdrawal penalty. I hope this helps!
So sorry to hear that. Depending upon the options in your 401k, and the amount of assets within it, really determines what you should do. If the 401k is sizable, but the investment options are few, you are missing out on diversification, therefore, doing a rollover into an IRA in which the adviser can manage and fully diversify you, as well as offer alternative investments for tax deferral and further protection, is probably most beneficial. You will pay a 10% penalty AND taxes on any withdraws before 59 and 1/2. More importantly, the amount needed for retirement is increasing everyday so withdrawing from a 401k or IRA should be your last option. Work with a financial adviser that will go over your budget with you, and determine what expenses can be cut, and financial strategies that can remove the need to begin drawing from your retirement saving, in order to preserve what you already have. Your adviser should also help manage and optimize the money rolled over into an IRA, by using several strategies for preservation and growth.
Debra - Simplest answer for now. KEEP the money in your 401k and do NOT roll it to an IRA (yet). IRS Publication 575 is very clear that if you are no longer working at your employer (separated from service) then you can withdraw from the 401k with no 10% penalty. There is no "hardship clause" or any other thing you need to worry about. The code is clear. http://www.irs.gov/pub/irs-pdf/p575.pdf
Jon Castle http://www.WealthGuards.com
Sorry to hear about your job loss. If you roll-over your 401k to the "new IRA account" then there is no penalty. The account will not be taxed and it is not considered to be a "withdrawal". If you withdraw money from the either the 401k OR the IRA you will pay taxes on the amount of the withdrawal. In addition, until you at 59 1/2 years old you will be also pay an additional 10% penalty. The penalty is to discourage individuals from taking money from what is supposed to be their retirement account. But you can escape that 10% tax penalty if you're withdrawing the money for a few specific reasons. These include: Paying college expenses for you, your spouse, your children or grandchildren. Paying medical expenses greater than 7.5% of your adjusted gross income. Paying for a first-time home purchase (up to $10,000). Paying for the costs of a sudden disability. Good luck on the job hunt.