How to Get Your 401(k) From an Old Job

When individuals change jobs, they often leave behind a 401(k) account with their former employer. Deciding what to do with this old retirement account is an important financial decision that requires careful consideration. Understanding the various options available can impact long-term financial security.

Exploring Your Choices for an Old 401(k)

Individuals with a 401(k) from a previous employer have several paths for their retirement savings. Each option presents different implications for access to funds, potential growth, and tax treatment. These include leaving funds within the former employer’s plan, transferring them to a new retirement account (such as an Individual Retirement Account or a new employer’s 401(k)), or taking a direct cash distribution. The latter is generally not recommended due to significant financial drawbacks.

Keeping Your 401(k) with Your Former Employer

Leaving your 401(k) funds with your previous employer’s plan is an option, provided the plan administrator allows it. Many plans permit former employees to keep their accounts, especially if the balance exceeds $5,000. If the balance is below this amount, the plan administrator might automatically roll over the funds into an IRA or distribute them to the former employee.

Choosing to keep your funds in the old plan means you continue to be subject to that plan’s investment options and rules. You will also need to maintain contact with the plan administrator to receive statements and track your account’s performance. There might be administrative fees associated with maintaining the account as a former employee, which could differ from the fees paid while actively employed.

Transferring Your 401(k) to a New Account

Transferring your old 401(k) into a new retirement account is a common strategy to consolidate savings and maintain tax-deferred growth. This transfer can go into a new employer’s 401(k) plan, if that plan accepts rollovers, or into an Individual Retirement Account (IRA). Rolling funds into a new 401(k) may offer benefits like loan provisions or creditor protection, while an IRA provides a wider range of investment choices and potentially lower fees.

Information and Preparation

To initiate a rollover, you will need specific information from your old 401(k) administrator, including your account number, the plan name, and their contact details. You should also decide whether to perform a direct rollover or an indirect rollover. In a direct rollover, the funds move directly from the old plan administrator to the new account custodian, which is the preferred method to avoid tax complications.

An indirect rollover involves the plan administrator issuing a check payable to you, which you then have 60 days to deposit into a new qualified retirement account. Note that the old plan administrator is required to withhold 20% of the distribution for federal income taxes. You must deposit the full amount of the distribution, including the 20% withheld, into the new account within the 60-day window to avoid taxes and penalties. If you do not deposit the full amount, the portion not rolled over will be considered a taxable distribution and may be subject to an additional 10% early withdrawal penalty if you are under age 59½.

You will need to obtain the necessary rollover request forms directly from your old 401(k) administrator. These forms require you to specify the type of rollover, the recipient account details, and the amount you wish to roll over. Review all instructions provided with the forms to ensure accuracy before submission.

Procedural Action

After completing the rollover forms, you will submit them according to the old plan administrator’s instructions. The processing time for a rollover can vary, often taking several weeks. For a direct rollover, the funds are electronically transferred or a check is mailed directly to the new account custodian. If you opted for an indirect rollover, you will receive the check, which you must then deposit into your new retirement account within the 60-day limit.

Once the transfer is complete, confirm with your new account custodian that the funds have been successfully received and correctly allocated. Review statements from your new account to verify the transferred amount. Your old plan administrator will issue Form 1099-R, detailing the distribution. This form is crucial for accurate tax reporting, even for direct rollovers.

Taking a Distribution from Your 401(k)

Taking a cash distribution from your old 401(k) means withdrawing the money directly. This option provides immediate access to funds but comes with significant tax consequences and penalties. It is considered a last resort due to the financial implications.

Information and Preparation

Any distribution you take from your 401(k) before retirement age is taxed as ordinary income in the year you receive it. In addition to regular income taxes, if you are under age 59½, you will face a 10% early withdrawal penalty on the distributed amount. There are specific exceptions to this penalty, such as distributions made after separation from service at age 55 or older, distributions due to disability, or for certain unreimbursed medical expenses that exceed a percentage of your adjusted gross income.

For eligible rollover distributions that are not directly rolled over, the plan administrator is required to withhold 20% of the distribution for federal income taxes. This withholding is mandatory and designed to cover a portion of the tax liability. However, the actual tax owed could be higher or lower than 20%, depending on your total income and tax bracket. You will need to obtain the necessary distribution request forms from your old 401(k) administrator. These forms will require you to specify the amount you wish to withdraw and may ask for your reason for the distribution, especially if you are claiming an exception to the early withdrawal penalty.

Procedural Action

Once you have completed the distribution forms, you will submit them to your old 401(k) administrator following their specified procedures. The processing time for a distribution can vary but ranges from several business days to a few weeks. The funds will then be disbursed to you, usually via direct deposit into your bank account or a mailed check, after the mandatory 20% federal tax withholding has been applied.

Upon receiving the funds, review the distribution statement provided by the administrator for accuracy. Your old plan administrator will also issue Form 1099-R, which reports the gross distribution amount and the amount of federal income tax withheld. This form is essential for filing your annual income tax return.