How to Get Your 401k From an Old Job
Learn how to confidently manage your 401k from a previous employer. Understand your options and next steps.
Leaving a job often presents a common financial scenario: what to do with the 401(k) retirement savings accumulated with a former employer. These plans hold significant value for future financial security, making informed decisions about their management important. This article clarifies the options for handling an old 401(k) and guides individuals through the process.
Options for Your Old 401(k)
When you leave an employer, several options become available for your old 401(k) account. One choice is to leave the funds within the former employer’s plan, which may be suitable if it offers desirable investment options and reasonable fees. However, some plans may have “force-out” provisions, particularly for smaller balances, requiring funds to be moved. If your balance is between $1,000 and $7,000, your former employer might automatically roll your funds into an Individual Retirement Account (IRA) if you do not take action.
Another approach is to roll over the funds into your new employer’s 401(k) plan, if permitted. This consolidates your retirement savings in one place. Alternatively, you can roll over the funds into an Individual Retirement Account (IRA), which offers a broader range of investment choices and potentially lower fees than some employer-sponsored plans.
The final option involves cashing out the funds, meaning you take a direct distribution. This results in immediate access but carries significant financial consequences. Cashing out typically triggers taxes and penalties, substantially reducing the amount received. This choice is generally not advisable for long-term retirement planning.
Key Information Needed for Action
Before taking any action regarding your old 401(k), gathering specific information is necessary for a smooth process. First, contact your former employer’s human resources department or the plan administrator. They can provide details about the 401(k) plan’s rules and your account status, including your vested balance, which is the portion of your account that you fully own.
Obtain recent account statements, as these documents contain information such as the current balance, investment holdings, and the plan’s custodian or recordkeeper. Inquire about any specific plan rules that might impact your decision, such as minimum balance requirements to keep funds in the plan or distribution consent requirements if your account balance exceeds $5,000.
If you plan to roll over your funds, gather details for the receiving account, whether it is a new 401(k) or an IRA. This includes the new plan’s name, account number, and the financial institution’s routing information. The old plan administrator will likely require a distribution request form, which you will need to complete with accurate information. Ensuring all required fields are filled out precisely prevents delays.
Executing Your Chosen Option
Once all necessary information has been gathered and relevant forms prepared, you can proceed with executing your chosen option for the old 401(k). If opting for a direct rollover, which involves moving funds directly from your old plan’s custodian to your new retirement account, submit the completed distribution request forms to your former employer’s plan administrator. This method is generally preferred because funds never pass through your hands, helping to avoid immediate tax implications and withholding. Direct rollovers typically complete within 3 to 14 business days.
For an indirect rollover, where funds are first paid to you, you must deposit the entire amount into a new eligible retirement account within 60 days of receiving the distribution. The old plan is required to withhold 20% for federal income tax. To complete the rollover and avoid taxation and penalties, you must deposit the entire original distribution, including the 20% that was withheld, into the new account. If the 60-day deadline is missed, the distribution becomes taxable income, and penalties may apply.
If you choose to cash out your 401(k), the plan administrator will process a direct payment to you. This usually involves submitting a withdrawal request form. Funds can be delivered via electronic transfer or by check. After submission, monitor the progress of your request by communicating with both the old plan’s administrator and the new financial institution to confirm the transfer is complete.
Understanding Tax Considerations
The tax implications of managing your old 401(k) vary significantly based on the option you choose. A direct rollover from your old 401(k) to another qualified retirement plan, such as a new 401(k) or an IRA, is generally a tax-free event. The funds move between custodians without being considered a distribution to you, so no income tax is immediately due, and no penalties are assessed.
However, if you choose an indirect rollover, the plan administrator will typically withhold 20% of the distribution for federal income tax purposes. To avoid income tax on the entire amount and any potential early withdrawal penalties, you must deposit the full original distribution, including the 20% withheld, into a new eligible retirement account within 60 days. If you fail to deposit the entire amount or miss the 60-day deadline, the distribution becomes fully taxable as ordinary income, and if you are under age 59½, an additional 10% early withdrawal penalty may apply.
Cashing out your 401(k) has the most immediate tax consequences. The entire amount withdrawn from a traditional 401(k) is taxed as ordinary income. Furthermore, if you are under age 59½, you will generally incur an additional 10% early withdrawal penalty on the taxable amount. You will receive IRS Form 1099-R from your plan administrator, reporting the distribution, and if you rolled funds into an IRA, you will later receive Form 5498 from the IRA custodian, reporting the rollover contribution.