Mad Money

Financial silver lining to losing your job

Cramer's Playbook: IRA vs. 401(k)

(Click for video linked to a searchable transcript of this Mad Money segment)

Few things in life are scarier than getting laid off from your job or simply being fired. But should it happen, Jim Cramer says there's a silver lining.

You can roll over your 401k plan into an IRA. And that money in your 401k maintains tax-deferred status "although you were only allowed to contribute $5,500 a year to your IRA while you were allowed to contribute $17,500 a year to a 401k," Cramer said.

Although Cramer realizes there are many serious challenges involved with losing a job, he's an optimist. He believes you'll find work. But losing your job, or leaving it for a new opportunity, frees you from the shackles of the company 401k plan, which is typically limited to a handful of investment choices and often involves all kinds of charges and fees.

Conversely, an IRA allows you to actively manage a portfolio. And if Jim Cramer believes anything, it's that an individual investor who holds the stocks of good companies, and then actively manages the holdings, can beat the pros with a portfolio of 5 to 10 quality stocks.

In other words, losing your job or leaving your job, is an opportunity to put your retirement money into a fund that Cramer thinks will serve you far better in the long-run.

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The mechanics of a rollover

In the event you find yourself in just such a circumstance, where you've lost your job or you've decided to pursue a new opportunity, and you are looking to rollover your 401k money, here are the choices you will likely be facing.

"You have the choice of cashing out your 401k, but that's disastrous," Cramer said. "If you cash out your 401k before you turn 59 and a half, the age at which you're allowed to start taking out money, then you get hit with a 10% penalty and you also have to pay state and federal income tax on every penny that comes out."

Don't do that.

"You can also do an indirect rollover, where your 401k administrator sends you the check and you have 60 days to get that money into an IRA. I'm begging you, don't try to go this route, either," Cramer said. "In case it takes you longer than 60 days, you end up having to pay all of those taxes and the 10% withdrawal penalty I mentioned above."

Don't do that either.

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Instead Cramer said, "Roll over your 401k money directly into an IRA. You do that by going to your old 401k administrator and giving them all the information about the IRA where you want them to send your money; account number, social security number, everything. This is what's known as a trustee-to-trustee transfer of funds, and it's the best way to go."

Call Cramer: 1-800-743-CNBC

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