How to Get Your 401(k) From a Previous Employer

A 401(k) plan is a retirement savings vehicle offered by employers, allowing employees to contribute a portion of their pre-tax salary. When an individual changes jobs, their 401(k) from the former employer does not automatically transfer or become immediately accessible. Managing a former employer’s 401(k) requires understanding the available choices for these accumulated retirement savings.

Understanding Your Options for a Former Employer’s 401(k)

Upon leaving an employer, individuals have several choices for their existing 401(k) account.
One option is to leave the funds within the former employer’s plan, provided the account balance meets the plan’s minimum threshold, often $5,000. This allows the funds to continue growing under the previous plan’s investment options and administrative structure. However, it means having retirement savings spread across multiple accounts.

Alternatively, funds can be rolled over into a new employer’s 401(k) plan, if the new plan permits transfers. This consolidates retirement savings into a single account, simplifying management and potentially offering new investment opportunities. The new plan’s administrator can provide details on their rollover acceptance policies and procedures.

Another option involves rolling over the 401(k) funds into an Individual Retirement Account (IRA). This provides greater control over investment choices and potentially lower fees, as IRAs often offer a wider array of investment products than employer-sponsored plans. An IRA rollover can be established with a financial institution of the individual’s choosing.

Finally, individuals may cash out their 401(k) by taking a lump-sum distribution. This option provides immediate access to funds but often comes with significant financial consequences. While it offers liquidity, it typically reduces long-term retirement savings and incurs immediate tax liabilities and potential penalties.

Preparing for Your 401(k) Action

Before initiating any action with a former employer’s 401(k), gather specific information and documentation. Contact the plan administrator for the previous employer’s 401(k) plan. Contact information can often be found through the former employer’s human resources department, on past benefit statements, or within the plan’s summary plan description. The plan administrator, which could be a third-party recordkeeper like Fidelity, Vanguard, or Empower, will be the primary point of contact.

Once contact is established, obtain specific details about your account and the plan’s distribution policies. This includes confirming the current account balance, understanding the vested percentage, and requesting any necessary distribution or rollover forms. Inquire about any specific plan rules or restrictions that might apply to withdrawals or rollovers. For instance, some plans may have specific blackout periods or require notarized signatures for certain transactions.

The plan administrator will provide the official forms required for the chosen action, often available on their website or mailed directly. These forms include sections for personal identifying information, details of the existing 401(k) account, and instructions for the desired action. For a rollover, this involves providing the receiving account’s information, such as the new IRA or 401(k) account number and the receiving institution’s routing details. For a cash distribution, direct deposit information for a bank account may be requested.

Executing Your 401(k) Rollover or Withdrawal

After gathering information and completing forms, initiate the chosen action. Contacting the plan administrator is the primary method to begin this process, which can often be done via phone, through an online portal, or by mailing the completed paperwork. The plan administrator will guide you on the preferred method for submission.

Submit completed forms and any supporting documentation, such as a voided check for direct deposit or a letter of acceptance from a new plan, according to the plan administrator’s instructions. This may involve mailing original documents, uploading scanned copies through a secure online portal, or faxing them.

For rollovers, two main types exist: direct and indirect.

Direct Rollover

In a direct rollover, funds transfer directly from the former employer’s 401(k) plan to the new retirement account (e.g., IRA or new 401(k)) without passing through the individual’s hands. This is a “trustee-to-trustee” transfer.

Indirect Rollover

An indirect rollover involves the plan administrator issuing a check payable to the individual. The individual then has 60 days from receipt to deposit the funds into another qualified retirement account.

Processing times can vary, typically ranging from a few business days to several weeks. Individuals should receive confirmation of the transaction, such as a statement showing the transfer or a check for a distribution. It is advisable to track the status of the request through the plan administrator’s online portal or by following up directly with their customer service department.

Tax Considerations for Your 401(k)

The tax implications of managing a former employer’s 401(k) depend on the chosen action.
When funds are rolled over directly from a 401(k) to another qualified retirement account, such as an IRA or another 401(k), the transaction is a non-taxable event. No immediate income tax is due, and no early withdrawal penalties apply, preserving the tax-deferred status of the retirement savings.

For indirect rollovers, where a check is issued to the individual, the Internal Revenue Service (IRS) mandates a 20% withholding for federal income tax. To avoid this withholding becoming a taxable distribution, the individual must deposit the full amount, including the withheld 20%, into a new qualified retirement account within 60 days of receiving the funds. If the individual does not deposit the full amount, the 20% withheld becomes a taxable distribution, potentially subject to early withdrawal penalties if under age 59½.

Cashing out a 401(k) by taking a lump-sum distribution results in the entire amount being treated as ordinary income for tax purposes. This means the distribution is added to the individual’s gross income for the year it is received and taxed at their marginal income tax rate. If the individual is under age 59½, a 10% early withdrawal penalty applies, in addition to regular income tax. Limited exceptions to this penalty exist, such as distributions due to disability or certain unreimbursed medical expenses.

Leaving funds in the old plan has no immediate tax implications. Taxes are only due when distributions are eventually taken, typically during retirement. Individuals should be aware of Required Minimum Distributions (RMDs), which mandate that account owners begin taking distributions from their retirement accounts, including 401(k)s and IRAs, once they reach a certain age, currently 73. Failure to take RMDs can result in an excise tax.