How to Get Money From a 401(k) From an Old Job

An old 401(k) represents funds saved with a previous employer, and understanding how to manage this account is an important financial step. Making informed choices about these funds can significantly impact your long-term financial security.

Understanding Your Options for an Old 401(k)

When you leave an employer, your 401(k) funds generally remain in the old plan unless you take action. One option is to simply leave the funds in the former employer’s plan, assuming the plan administrator allows it. This can be a passive approach, though it means you no longer contribute to that specific account.

Another common choice involves rolling over the funds to a new employer’s 401(k) plan. This consolidates your retirement savings into your current workplace plan. This option can simplify management by keeping all your active retirement contributions in one place.

Alternatively, you can roll over the funds into an Individual Retirement Arrangement (IRA). This offers broader investment choices compared to many 401(k) plans. You can choose between a Traditional IRA or a Roth IRA, each with different tax treatments.

A final option is to take a direct distribution, commonly known as cashing out the account. While it provides immediate access to funds, it often carries significant tax implications and potential penalties.

Key Considerations Before Taking Action

Before making any decisions about your old 401(k), gathering specific information is important. Begin by locating your old plan and account details, which may be found in past statements. If statements are unavailable, contact your former employer’s human resources department, as they can provide the plan administrator’s contact information. You can also search online databases like the Department of Labor’s abandoned plan database or the National Registry of Unclaimed Retirement Benefits.

Once you have identified the plan administrator, contact them to assess plan-specific rules and fees. Different 401(k) plans have unique provisions regarding distributions, rollovers, and administrative costs. Average recordkeeping fees for 401(k) plans can range from $45 to $80 per participant annually, while overall plan costs might average around 0.49% to 1% of plan assets, though some plans may have higher fees. Understanding these fees for both your old plan and any new accounts you are considering is important for maximizing your savings.

Understanding the tax implications of each option is important. Qualified rollovers are generally tax-free, meaning no immediate taxes are due when funds move directly from one retirement account to another. However, if you receive the funds yourself in an indirect rollover, you must redeposit them into an eligible retirement plan within 60 days to avoid taxation and penalties, as per Internal Revenue Code Section 402(c). Failing to meet this 60-day deadline means the distribution becomes taxable income and may incur penalties.

Taking a direct cash distribution results in the funds being taxed as ordinary income. If you are under age 59½, these withdrawals may be subject to a 10% early withdrawal penalty under IRS Rule 72. The plan administrator is also required to withhold 20% for federal income tax from eligible rollover distributions that are not directly rolled over. This withholding is applied even if you intend to roll over the funds within the 60-day period.

Executing a Rollover to a New Retirement Account

Once you have gathered the necessary information and decided on a rollover, the next step is to initiate the request. Contact the administrator of your old 401(k) plan to begin the process. They will provide the specific forms and instructions required for transferring your funds.

You will have a choice between a direct rollover and an indirect rollover. A direct rollover is preferred, as the funds are transferred directly from your old plan to the new account custodian, such as your new employer’s 401(k) provider or an IRA custodian. This method avoids the mandatory 20% federal tax withholding that applies to funds distributed directly to you.

An indirect rollover involves the plan issuing a check to you, the individual. You then have 60 days from the date you receive the funds to deposit them into the new retirement account.

After initiating the request, you will need to complete and submit the necessary transfer paperwork from both your old plan administrator and the new custodian. This paperwork ensures the funds are properly allocated to your new retirement account. It is advisable to track the transfer by following up with both the old and new custodians to confirm the successful receipt of your funds.

Taking a Direct Cash Distribution

If you decide to take a direct cash distribution from your old 401(k), you will need to contact the plan administrator to request the withdrawal. This process involves completing specific forms provided by the administrator. They will outline the steps required to process your request.

When you take a direct distribution, the plan administrator is required to withhold 20% of the distribution for federal income tax. Some states may also have their own withholding requirements, which would further reduce the amount you receive. The funds will then be delivered to you, often by check or direct deposit, after the withholding has been applied. Taking a direct cash distribution can significantly reduce your retirement savings due to taxes and penalties, making it a less financially efficient option for most individuals.